Obama, regulation, and electricity markets
I missed this part in Obama’s big economic speech when he first gave it, but it’s worth highlighting:
Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform — to foster competition, lower prices, or replace outdated oversight structures. …
Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one …
Deregulation of the telecommunications sector, for example, fostered competition but also contributed to massive over-investment. Partial deregulation of the electricity sector enabled market manipulation. Companies like Enron and WorldCom took advantage of the new regulatory environment to push the envelope, pump up earnings, disguise losses and otherwise engage in accounting fraud to make their profits look better – a practice that led investors to question the balance sheet of all companies, and severely damaged public trust in capital markets. This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment.
A decade later, we have deregulated the financial services sector, and we face another crisis.
I like this point about partial electricity deregulation. What happened in California is hardly evidence of what open markets do with electricity. It was a rigged game.
The point of restructuring utility markets is not to dismantle 20th century regulations piecemeal, but to implement a new regulatory framework more suited to our present economic and environmental needs. A crippled regulatory framework, or the absence of any framework at all, is not good for markets or customers. It’s good for a small set of inside players. Everyone else benefits from transparency and predictability.