Power Grid Neutrality

I just got a copy of my friend Tim Carney’s The Big Ripoff: How Big Business and Big Government Steal Your Money I’ve only had time to thumb through it so far, but I thought I’d mention a fascinating chapter on the Enron debacle.

Tim explains how the California power crisis was largely due to the “deregulation” of electricity that Enron lobbied for. I put deregulation in scare quotes because although the regulatory changes introduced in 1998 did increase competition in some aspects of the electricity market, this was far from a free market. Indeed, as Carney documents, Enron lobbied for rules that would rig the market in its favor: the price of power it sold into the California market was unregulated, but the transmission networks which carried that power had an “open access” regime in which prices for the use of the power grid were set by the government. California also prohibited the utilities from generating electricity themselves, forcing the utility companies to buy their power from middlemen like Enron.

Of course, we know the rest of the story: with retail prices tightly controlled and wholesale prices unregulated, wholesale prices spiked and utilities began bleeding red ink. Enron made a bundle, and California got rolling blackouts.

Enron had a crucial advantage in the electricity market: they understood their business and the regulatory process better than anyone else, and they were willing to spend the money on lobbyists and lawyers to get beneficial regulatory changes enacted. As a result, they knew precisely which regulatory changes would help them, and could lobby for them while publicly proclaiming their support for deregulation and free markets. Voters, most of whom are not experts on power grid economics, didn’t have a clue what was going on. For that matter, neither did most politicians–the regulatory changes were passed almost unanimously by the legislature.

This is another example of the point I made last week: once you place an industry under the control of government regulators, the regulated companies will begin devoting substantial resources to turning those regulations to their advantage. And not only will the rest of us not have the resources to fight back–we may not even understand what’s going on.

It’s easy to imagine the same thing happening with network neutrality regulations. Most of the activists pushing for new government regulations don’t seem to even have a solid understanding of how the Internet works right now. As the regulatory scheme gets more complicated, as regulatory schemes inevitably do, it will be more and more difficult to keep the industry honest.

The regulatory game is a game that consumers almost always lose. Which strikes me as a good reason to avoid playing it.

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