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PG&E's Failures Show the Dangers of Government-Imposed Utility Monopolies

Muda69

By Muda69
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Muda69 Grand Master

Muda69

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https://mises.org/wire/pges-failures-show-dangers-government-imposed-utility-monopolies

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Although the roughly two million affected residents of Northern California are recovering from the rolling blackouts imposed by utility PG&E, the company has warned that these “fire safety outages” may be periodically required for another decade. Naturally, California Governor Gavin Newsom decried the debacle as yet another example of “greed and neglect.” Yet as IER analyst Jordan McGillis explained in a previous article, the episode actually showcases the dangers of a government-imposed monopoly in electricity provision. In this article, I’ll elaborate on McGillis’ insights and show why the conventional economic rationale for government regulation of electric utilities is fundamentally flawed.

PG&E’s Rolling Blackouts Not a Free-Market Outcome

When a company screws up so horribly, letting down literally millions of its customers and moreover promising to continue doing so for another decade (!), the obvious question is: Why don’t they go out of business? Why doesn’t a competitor grab their market share?

The answer, of course, is that the California government forbids PG&E’s customers from switching to a competitor. Let me quote directly from McGillis who gets to the heart of the matter:

PG&E does not function as would a company in a competitive marketplace. As a regulated monopoly, it has been granted status as the sole provider of electricity to a swath of the state stretching more than 500 miles from Eureka, north of the Bay Area, to Bakersfield, in the San Joaquin Valley. The company operates in tandem with the California Public Utilities Commission (CPUC), a panel of regulators appointed by the governor. Unlike in a competitive marketplace, PG&E does not need to compete for customers by offering more value dollar-for-dollar than other companies. Instead PG&E is guaranteed a rate of return on its investments and establishes with the CPUC the corresponding rates that customers will pay.

So we’ve solved the most immediate puzzle: The reason PG&E can get away with such outrageous mismanagement and shoddy customer service, is that the California government literally guarantees them their business. It is illegal for another company to try to entice PG&E’s disgruntled customers to switch their patronage.

...

Any adult American reading my article surely can agree—regardless of your politics—that I am speaking the truth. To repeat, you simply do not see private companies in (relatively) open markets operating the way PG&E and other “public utilities” do. So the mismanagement and shoddy service of PG&E can’t possibly be the fault merely of corporate greed and neglect. Rather, the difference is due to the institutional structure and incentives that the government sets up.

As McGillis explained in the block quotation above, a regulated public utility is typically given a monopoly for a certain region. It’s not allowed to charge “whatever the market will bear,” but instead must have its retail prices approved by government regulators. After showing the regulators the official cost of providing the service—whether electricity, natural gas, land phone lines, water, etc.—the utility is then allowed to charge enough to cover its costs and earn a reasonable rate of return for the investors.

The problem with this approach should be all too obvious, in light of PG&E’s debacle and the similar episodes we see all the time with other government-regulated monopolies—the residential drinking water crisis in Flint, MI comes to mind. Once a company is guaranteed its customers, with competition expressly outlawed, there is little reason for it to maintain quality.

Furthermore, because the retail price to the final consumer is regulated, whenever the quantity demanded exceeds the supply, the only solution is to artificially restrict the ability of customers to use the product. In a normal, relatively unregulated market, the price rapidly adjusts to balance the quantity demanded and supplied. In extreme situations—such as the immediate aftermath of a hurricane—this can lead to “outrageous” prices for bottled water and batteries, but such “price gouging” is exactly what we want to ration the available supply and motivate outsiders to bring in new supplies.

The Conceptual Flaw With Mainstream Models of Regulation

The textbook rationale for regulating certain services—such as residential electricity and water—is that they constitute “natural monopolies.” The idea is that a certain level of infrastructure spending is necessary to even have the ability to offer these services to a particular region, and so in an unregulated open market you would either have unnecessary duplication—with a given street having numerous pipes and power lines from different companies—or you would have one company that had captured the market and could charge outrageously high prices for such essentials. In order to combat these undesirable outcomes, the model of a publicly regulated monopolist with cost-plus pricing was developed.

Yet as I’ve argued above, there is something terribly wrong with this approach. It simply takes it as a given that a regulated monopoly will provide the same quality of service as one facing open competition, which we see in practice is simply not true. Furthermore, as those in the Austrian tradition of economics stress, there is no such thing as an objectively given “cost of production.” Firms need to discover cheaper methods of producing electricity, water, etc., and we would expect them to look more diligently when they have profits as a reward. In other words, once your firm is allowed to charge its “cost” plus a markup for profit, you have no reason to weed out inefficiencies—the regulators will simply make you cut your retail price.

Conclusion

The PG&E debacle showcases the flaws of government-regulated monopolies. This is not an isolated incident, but is typical of the entire model. Yes, there are practical reasons that free and open competition might not work as smoothly with services requiring large infrastructure spending, but these complications pale in comparison to the dangers of having government outlaw competition. If we see the benefits of competition in trivial goods like soda and cereal, we should all the more so insist on competition for essentials like electricity and drinking water.

Agreed.  Government-backed utility monopolies need to go away, and they need to compete in a free and open market.

 

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Muda69 Grand Master

Muda69

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7 minutes ago, Impartial_Observer said:

Seems to be working well in Venezuela.

https://www.washingtonpost.com/news/democracy-post/wp/2018/04/10/in-venezuela-a-daily-struggle-for-the-basic-necessities-of-life/

Yep, a socialist like Dante's utopia, if only they could somehow do "socialism better".  Whatever the heck that means.

 

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DanteEstonia Rising Star

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1 hour ago, Impartial_Observer said:

Seems to be working well in Venezuela.

https://www.washingtonpost.com/news/democracy-post/wp/2018/04/10/in-venezuela-a-daily-struggle-for-the-basic-necessities-of-life/

It’s worked in the Tennessee since the 1930s. 

2 hours ago, Muda69 said:

You must be joking.  Exactly how would that make them more efficient and more open to market forces?

You run everything at cost, for public benefit.

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Muda69 Grand Master

Muda69

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Just now, DanteEstonia said:

It’s electricity. It can’t be improved. You can change how it’s made, but that’s it.

*sigh*  

https://www.ucsusa.org/resources/how-electricity-grid-works

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...

As technology changes and better options become available, significant improvements could be made to the electricity grid.

For example, energy storage technologies could allow electricity to be stored for use when demand for electricity peaks or increases rapidly, increasing efficiency and reliability. Newer, more advanced meters such as self-programming thermostats will allow better data collection for more effective management and faster response times. Even vehicles could play a role, as smart charging can allow electric cars to interface with the electric grid. 

Distributed generation systems, such as solar panels on individual homes, reduce the distance that electricity has to travel, thereby increasing efficiency and saving money. Investments made by consumers – such as purchasing energy-efficient appliances, constructing more energy-efficient buildings, or installing solar panels – save customers money and utilize energy more efficiently at the same time.

Not under Dante's socialist system. He would be be content with DC power generated by coal fired plants.  After all, you run everything at cost, for public benefit.  

 

 

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Impartial_Observer Mentor

Impartial_Observer

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26 minutes ago, DanteEstonia said:

It’s worked in the Tennessee since the 1930s. 

Sure. 

https://www.tn.gov/content/dam/tn/publicutility/documents/utilitydivdocs/listofnontelecomutilities.pdf

12 minutes ago, DanteEstonia said:

It’s electricity. It can’t be improved. You can change how it’s made, but that’s it.

Aside from the obvious, spikes, voltage variances, etc., what about the generation, transmission, and distribution?  What about alternative energy sources? Assuming since we're selling at cost, the fed will just print the money to fund research?

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gonzoron Veteran

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13 minutes ago, Impartial_Observer said:

TVA is a customer owned co-op which generates electricity and sells it to others. Seems to be some debate about selling transmission infrastructure to the private sector. 

If Wikipedia is correct, it's a federally owned Corporation. https://en.wikipedia.org/wiki/Tennessee_Valley_Authority

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Muda69 Grand Master

Muda69

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9 hours ago, DanteEstonia said:

The Tennessee Valley Authority is owned by the Federal Government.

https://www.tva.gov/About-TVA

Yet another remnant of FDR's socialism.  It should have privatized years ago:  https://www.washingtonpost.com/opinions/think-about-privatizing-the-tva/2013/04/25/3b6bbf34-a860-11e2-b029-8fb7e977ef71_story.html

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But there are real policy issues here, and it’s time Washington addressed them. As Mr. Obama’s budget argues, the TVA has long since accomplished its original purposes of economic development and rural electrification. Nowadays, the cheap power the TVA provides may help Southern states compete with others for business investment, but it’s unclear why that’s a legitimate federal goal.

Yes, the TVA covers its costs through power sales and borrowings, not federal outlays. But it can do that only because its unique federal connection enables it to borrow at favorable rates. The TVA’s $27 billion debt counts as part of the national debt — and the market perceives it as government-guaranteed.

For the federal taxpayer, privatizing TVA’s power system would bring two main benefits: cash from the sale and relief from the risk that the TVA would someday need a federal bailout. That risk is small, but it is not zero; the TVA’s debt-to-capital ratio is already 86 percent, which Moody’s considers “high.”

....

 

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Impartial_Observer Mentor

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39 minutes ago, DanteEstonia said:

Sell it after the feds did all the work, of course.

Trump wasn't the first president to float the idea of selling it. But once again the government continues to shoot itself in the foot.

https://www.theatlantic.com/politics/archive/2013/04/goodbye-new-deal-obama-proposes-selling-tva/316380/

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Muda69 Grand Master

Muda69

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1 hour ago, gonzoron said:

It receives no taxpayer funding.

In this case irrelevant.  Perhaps you need to revisit the definition of the word 'socialism'.

Government should not be in the utility business, period.

https://www.cato.org/publications/tax-budget-bulletin/privatizing-federal-electricity-infrastructure

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Private-sector utilities provide the bulk of electricity generation, transmission, and distribution in the United States. However, the federal government also owns a share of the nation’s electricity infrastructure.

The government owns the Tennessee Valley Authority (TVA), as well as four Power Marketing Administrations (PMAs) — namely, the Bonneville Power Administration (BPA), Western Area Power Administration (WAPA), Southwestern Power Administration (SWPA), and Southeastern Power Administration (SEPA). TVA both generates and transmits power, whereas the PMAs mainly transmit power generated by dams owned by the Army Corps of Engineers and the Bureau of Reclamation.

Federal entities account for 7 percent of U.S. power generation, and they own about 14 percent of the nation’s transmission lines.1 Most of the power carried by the PMAs is hydroelectric, but an exception is that BPA buys power from the Columbia Nuclear Generating Station, owned by the state of Washington.2

The PMAs sell most of their power to “preference” customers, mainly government-owned local utilities and rural electric cooperatives (RECs).3 RECs are customer-owned nonprofit companies, which have grown because of their access to PMA power and the receipt of federal subsidies.4 PMA “preference” customers have first rights to buy low-priced federal power.

This bulletin discusses the PMAs, the related federal generation facilities, and the RECs. It argues that federal power infrastructure should be privatized and that subsidies to the RECs should be ended. A separate Cato study discusses privatizing the TVA.5

The federal government entered the electricity business in the mid-20th century when faith in government ownership was high. But over time it has become clear that government-run businesses typically lag private businesses in efficiency, innovation, and environmental performance. As such, there has been a global trend toward privatizing government-run businesses.6 In recent decades, more than 100 countries have moved thousands of firms — worth a total of more than $3 trillion — to the private sector.7 Many nations have privatized parts of their electricity infrastructure.8

In its 2018 federal budget, the Trump administration proposed privatizing the PMAs. The budget said that “ownership of transmission assets is best carried out by the private sector where there are appropriate market and regulatory incentives.”9 And it said the proposal to “eliminate or reduce the PMA’s role in electricity transmission and increase the private sector’s role would encourage a more efficient allocation of economic resources and mitigate risk to taxpayers.”10

The administration is on the right track. About three-quarters of Americans receive electric power from for-profit private utilities.11 There are no sound policy reasons for the other one-quarter to be supplied by government facilities and subsidized nonprofit firms. Privatizing the PMAs and federal generation facilities would raise funds from the initial selloff, and the new private entities would pay income and property taxes, thus raising revenues for federal, state, and local governments. Ending subsidies to the RECs would also benefit the federal budget.

....

 

 

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gonzoron Veteran

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10 minutes ago, Muda69 said:

In this case irrelevant.  Perhaps you need to revisit the definition of the word 'socialism'.

Government should not be in the utility business, period.

https://www.cato.org/publications/tax-budget-bulletin/privatizing-federal-electricity-infrastructure

 

Just opinions. Privatization rarely eases cost to consumers, or provide a better quality of service. Plus, it does not lower taxes.

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