Free market force vs regulation should not be, and is not, a national or a moral issue. The study of economics reveals many instances where free markets are sometimes ineffective and inefficient. As Z points out, we don't leave the highway system to the market. You could throw in education, national defense and others.
What do you do when a service that may be vital to the well being of a country is at stake? What kind of benefits and costs are not recognized in the profit and loss statements of companies that do business for profit? How do you allocate scarce resources where the most good for the most people may not be accomplished by allocation through market pricing? (Did anyone follow the South African Aids medicine issue?)
These are the types of questions that come up periodically and the answers are sometimes that the free market is not the best answer. It is not just socialistic thinkers that reach these conclusions, there is agreement among the greatest advocates of capitalism and free market forces. Any study of economics will clearly include the analysis of those instances where free market pricing and competition are not efficient or equitable, and does not work. The free market, which is the best system of allocating resources, has some limitations. I believe that the issue of energy markets should be discussed in that context.
It seems clear that energy markets have at least two characteristics that leave room for sound arguments for some regulation. One is that the availability of energy in our society is inarguably vital from an economic, health and national security point of view. The cost of energy is high. The cost of energy outages, even short term, is astronomical. I think Z may be right in stating that the free market has no incentive to build in the excess capacity that will only be required in those instances that occur to infrequently to justify investment. In some sense there is actually a free market disincentive to build for that possibility, since in a free market when you have a scarce recourse that is vital, the pricing is in the hands of the seller. Imagine if there was only enough medicine to treat 10% of those suffering from a life threatening disease and your child had it. What price would be too high? Look what happened in Ca when the availability of power fell below the demand. That is admittedly a different level of "need" but the scarcity of a resource that has become an economic neccesity for industry, heating and the running of our complex health, government and social infrastructure revealed the pricing power that would rest in the hands of energy producers in a world where energy became scarce.
A second reason for regulation is probably found in the hidden costs of energy that are not reflected in the balance sheets of energy producers and consumers. This would include things like health and environmental costs as a result of the use of energy in one form or another, including costs that will likely be paid by our children and their children and not by us.
The historical answer has been a hybrid free market-government regulated system. In California the "deregualtion" was in reality an attempt to move more towards free market and away from government regulation.
I'm all for deregulation whenever possible. The thought of beaurocrats having control over anything, much less anything as important as energy is frightening. On the other hand, the thought of placing total control of a necessary resource in the hands of a few very large corporations is equally scary. The answer appears obvious, there will be free market pricing but not to the point that the prices will be allowed to interfere with the basic functioning of the economy.
In answer to Whitepine's pivotal question, a fair price will be a price that would allow energy companies to make a profit that would encourage the allocation of capital to the energy sector and reward investors for their risk. It would not be a price that would result in a shock to the economy with effects that far exceeded the benefits that might be realized by pumping that extra capital into the energy coffers. In other words, even though the tail might have the power to wag the dog, the government would not allow it.
If you disagree, think what would happen if the California crisis spread to the western states and then east. The fact that energy companies stood in the unique position of being poised to benefit from being in the sweet spot of controlling the availability, and thus the price, of a necessity would not justify the use of that pricing power to price to the last penny. Just as we would react to a water shortage, a health shortage or some other emergency situation, we would control both the allocation and the price of that resource. It only seems different because it is California that is in that box now and not the rest of the country.
As a side note, I do agree with all of the criticism of the California legislature and both governors, Republican and Democratic, one for his role in helping to create this and one for his role in refusing to face it. It is interesting that the state referred to sometimes as the "socialist" state, was actually leading the way in terms of deregulation. If it hadn't led the way then one of our other states would likely have stumbled and we would be talking about how stupid they were. I don't have the answers, but neither do those who want to let the "market" control this near term scarcity. Ed |
