Learning the Hard Way

In its slowly unfolding tragedy, Texas found the limits—not that they were unknown, unforeseeable, or even unavoidable—in how far we should go in deregulating industries that operate our critical infrastructure. February in Texas is precisely the reason that we created regulated utility monopolies decades ago.

One reason to regulate is to avoid the cost and logistical problems associated with duplicative infrastructure. That’s why most places have single gas, electric, cable, and water utilities. The other is to prevent the Texas-size chaos that still has residents there boiling drinking water. Deregulated energy companies there did what any company does: cut costs to maximize profits. In the Lone Star state, that meant not joining the national networks of energy distributors, leaving the state nowhere to turn when the cost-cutting exercise of not winterizing their power plants came home to roost.

Deregulation in Texas constituted a race to the bottom—the bottom line—which is what one gets when the effect of price and cost on profit margins are one’s only considerations. But deregulation didn’t even save Texans money. The Wall Street Journal: “Texas electricity bills were $28 billion higher under deregulation than they would have been under the old regulatory system...Texas’s deregulated electricity market, which was supposed to provide reliable power at a lower price, left millions in the dark.”

The Texas experiment put private industry in charge of energy infrastructure. Many states have played with a form of deregulation. For instance in the natural gas market many states now have the regulated supplier but have allowed distribution to go to marketing companies. These regulatory rollbacks usually mean higher consumer prices—after all, when does adding a middle man ever decrease prices? A former Georgia energy executive tells me deregulated natural gas marketing has given that state the highest prices in the nation. But service continues unimpeded because the backbone firms, the actual energy producers, pipeline and storage companies, and long-haul electricity distributors, remain regulated monopolies.

In Texas, a conglomeration of eighty unregulated companies that generate, distribute, and market electricity and natural gas had a free-for-all that left the state crippled in the face of severe weather, and landed five-figure monthly utility bills in the laps of some unsuspecting consumers. Let the buyer beware, indeed.

California learned the hard way during the Enron years when Sacramento thought energy deregulation was the way to go. Unprecedented price hikes and rolling blackouts because enough energy could not be produced or procured, caused immense harm. Deregulation led to hedging the energy markets, Enron’s specialty. “The Smartest Guys in the Room,” the book-come-motion-picture, detailed the way an unencumbered market invites dangerous cost-cutting, stock speculation, and unscrupulous manipulation.

We regulate to stave off late-stage capitalism’s natural endgame, which is monopoly. In addition to seeding chaos, left unchecked, industries tend toward consolidation. Companies gobble each other up to build market share and the pricing power that comes with it. Thus, they become oligopolies (as in controlled by a small number of companies), then duopolies where two companies control an entire industry, and ultimately monopolies where one conqueror reigns. Teddy Roosevelt, “The Trust Buster” knew it at the dawn of the Industrial Revolution.

Presidents since have fought for regulations that protect smaller companies, workers, homeowners and renters. Realizing the forces of commercialization would develop every square inch of available land, cut down every tree, and poison our air and water if allowed to, Richard Nixon created the Environmental Protection Administration.

Two Boeing 737-Max crashes highlighted the dangers of “regulatory capture” where industry owns the regulators instead of the other way around. FAA, which has regulators embedded at the plane-maker’s facilities, turned critical safety decisions over to Boeing. A software upgrade was represented to FAA personnel as routine, and so never came under intensive review. The results were fatal to over 300 souls, and very nearly to our leading export company, as Boeing itself is on the rocks and still has a long climb out of the wreckage it created.

There is a constant drumbeat to deregulate and/or privatize all kinds of industries, and that begs the question of how far we should go. There is clearly merit in reducing silly, unproductive government bureaucracies, but letting industry decide who gets regulated is dangerous. Ask yourself if we should have privatized our prisons? Do we really want a for-profit industry that has companies lobbying for laws that create even more inmates in a country that has 4% of the world’s people and 22% of its prisoners? One result is private telephone companies charging $20 for a three-minute call that would be free anywhere else in the country. The move to privatize public schools raises its own questions.

This shouldn’t really be so hard, but have faith. Churchill said Americans always do the right thing—after trying everything else first.