I’ve just returned from a conference on regulation in Bulgaria organized by the Istituto Bruno Leoni, a classical liberal think tank in Italy that does a lot of extremely good work developing and applying classical liberal principles and ideas to public policy issues in Italy and Europe. The topics included financial markets regulation, energy, and telecom/internet.
The organizers asked me to comment on risks and regulation with respect to energy and the environment. The topic prompted me to ask: risk to whom, and risk of what? The parties whose risks I analyze are consumers, the end users.
Risk of what? Historically, at least in the US, risks related to reliability of service and bankruptcy of firms have been the primary focus of regulatory policy. Keep the lights on, no matter the cost, and treat that as a uniform standard (by technological necessity, until the invention of good switches). Use economic regulation (rate of return + monopoly service territory for the vertically integrated firm) to ensure the firm’s financial stability. These two objectives have had the consequence of significant infrastructure redundancy at a substantial cost, and increased incentives to firms to build those redundant electro-mechanical infrastructure systems.
More recently, environmental risk has become more prominent, and increased the combined economic and environmental regulatory policy focus on electricity generation. Initially the concern was the “criteria pollutants” such as SO2, NOx, etc., but the focus has shifted in the past two decades to greenhouse gases and carbon policy. The emission policy options range from
- Do nothing while we do more scientific research into the complex and little-understood climate system
- Price carbon with a tax … but with this policy one cannot control emission quantity
- Constrain GHG emission quantities with emission permit markets … but with this policy one cannot control emission price
- Traditional command-and-control regulation: emission quotas, renewable portfolio standards … but this approach has high enforcement costs, with centralized decision-making that’s likely to be inefficient because it cannot reflect, as Hayek said “individual knowledge of time and place”
Other important economic risks to consumers include the effects of wholesale and retail price volatility as fuel prices fluctuate, and the mounting effects of the lack of innovation and new technology adoption in the customer-facing portion of the value chain.
That was the setup part of my remarks, and I’ll post the rest in a follow-up … but for now, tell me: what are some other ways to think about the risks associated with regulation, and the attempts of regulation to mitigate certain risks, that face electricity consumers?