Montreal, September 15, 2011 • No 292


Harry Valentine is a
free-marketeer living in Eastern Ontario.



Exploring the Alleged Failure
of Market Deregulation


by Harry Valentine


          Several commentators on the economics of the electric power sector have recently proclaimed the failure of market deregulation. This proclamation is based on electric power prices escalating by some 533% over a period of 8 months following market deregulation in California. Proponents of market deregulation had previously theorized that prices would decline after markets were deregulated. An examination of the history of market regulation provides some insight as to the pricing of goods and services before and after state intrusion into the market.


From Guilds to Grids

          State intrusion into various market sectors took many forms at different times in history. In some cases, guilds and trade brotherhoods sought political favours to protect their trades from competition. The state subsequently enforced market entry restrictions that kept potential competitors out of the market. During the latter 19th century, politicians sought to protect the American horse-drawn stagecoach industry from competition from the railroads by imposing state-enforced railroad tariffs.

          Technological advancement in the form of battery-powered, steam-powered and early gasoline-powered wagons that operated on the road and on rails eventually replaced horse-drawn stagecoaches. However, governments continued to impose economic regulation on the railways for a variety of political purposes that were intended to please voters. But over time, continued economic regulation ultimately results in the malinvestment of funds and the misallocation of resources into unproductive or less productive areas.

          Government intrusion into the privately owned and operated electric power sector forced electric power providers to offer services to uneconomic rural markets at prices equal to those enjoyed by customers in large cities. The power companies earned high revenues in their major markets and internally cross-subsidized their less productive services that were required by government. State-enforced market regulation of the power industry required power providers to seek permission from elected and non-elected officials in order to build new power stations. California had at one time imposed a moratorium on the construction of new power stations.

Price Hikes

          Leaving aside the inconsistent nature of the reforms, when jurisdictions such as California and Ontario attempted deregulation of their power industries, the industries needed to liquidate decades of malinvestment and misallocation of resources that resulted from government control. Market regulation had previously served the political purpose of assuring the electorate of low electric power prices. At the time of deregulation, power companies in California and Ontario had a shortage of generating capacity and power distribution grids that had been neglected for decades and were in serious need of upgrade. The condition of power industries following market deregulation required power providers to quickly raise capital to build new (unsubsidized) generation capacity and to upgrade the power distribution systems.

          The results in both Ontario and California were massive increases in power prices as market forces slowly attempted to rectify decades of massive malinvestment and misallocation of resources, the result of market regulation aimed at pleasing voters. Had market regulation been successful, the transition toward a regulation-free market environment should have had no effect on power prices. But the state had imposed power rates that were well below the levels that would otherwise have evolved in an unregulated private market The post-deregulation escalation in power prices resulted directly from many years of system neglect caused by economic regulation for mainly political purposes, namely capturing votes at election time.

"Leaving aside the inconsistent nature of the reforms, when jurisdictions such as California and Ontario attempted deregulation of their power industries, the industries needed to liquidate decades of malinvestment and misallocation of resources that resulted from government control."

          Following the post-deregulation price hikes, politicians feared a voter backlash and quickly re-regulated the newly deregulated power markets. Power companies were subsequently accused of being ruthless money grabbers and price gougers. Elected and non-elected officials absolved themselves of any responsibility for having created a power generation and distribution system that was rife with malinvestment and that quite literally needed to be rebuilt. The private capital needed to rebuild the power grid and develop new generating capacity was and still is in very short supply. One of the few options available to the power sector in several jurisdictions internationally was and still is to raise power rates.

          The power industry is one example of how government regulation can cause more problems than it purports to solve. Perhaps the only way that government could extricate itself from unproductive market regulation of the power industry would be after the entrepreneurial world develops affordable, mass-produced, low-cost micro-power stations with a few kilowatts of output. Owners of such generating capacity could recover the cost of their investment by selling some power to their next-door, backdoor and diagonal-backdoor neighbours. Such an option would require many jurisdictions to repeal the laws that prohibit private power lines across private property lines.

Looking Ahead in Other Sectors

          Technological advances in the telecommunications sector have created a cost-competitive economic environment that could allow government to extricate itself from the regime of telecommunications market regulation. Such deregulation could occur without causing the economic upheavals that occurred in the power sector. But government officials still seek to achieve a political agenda in the area of culture that indirectly involves the telecommunications sector. Modern telecommunications technology allows information signals to travel along electric power cables with transmission and reception capability at both ends.

          Such technology could allow hundreds of micro radio and television stations to emerge amongst customers who live inside groups of nearby apartment buildings, where such transmission would be possible. Laser light and sub-audible, ultra-low frequency sound waves can travel considerable distances through the atmosphere. None of these technologies generates radio waves that would otherwise transmit through the atmosphere, perhaps interfering with radio telecommunications used by airports, police, ambulances, the military and other agencies. Private broadcasting that is independent from atmospheric radio waves would neither interfere with the aforementioned radio telecommunications, nor represent any threat to public safety.

          The Government of Canada has proposed terminating the crown corporation that markets wheat and barley known as the Wheat Board. Many farmers have already shown that they can operate outside of the government agency and market their produce themselves. There are many state-regulated sectors of business from which government can extricate itself through market deregulation without causing the upheavals that resulted from power deregulation. The current economic slowdown may well continue over the next several years. During such time, the absence of economic regulation could increase the productivity of many small businesses, and perhaps also encourage more of the younger generation to seek opportunity as entrepreneurs in a market environment relatively free from government regulation.