Economics: Regulation and Deregulation of Energy Sectors

author: Paul L. Joskow, Department of Economics, Massachusetts Institute of Technology, MIT
published: April 19, 2013,   recorded: June 2006,   views: 2695

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After viewing Paul Joskow’s meaty history of the nation’s energy industries, the baffling line items on your monthly utility bill may make more sense.

Joskow describes energy as perhaps the most regulated area in the U.S. economy. The natural gas, electricity and oil businesses have seen price caps and floors, as well as regulations around service quality and safety, environmental impacts, energy efficiency and entry of new suppliers. Different rationales spur these rules, from interest group politics to the need for more reliable energy production.

Some of these regulations have led to unanticipated and negative outcomes. Joskow describes the “sorry history of price regulation” of crude oil in the 1970s and early ‘80s, which followed a public outcry against high oil prices. When the government tried to set prices on this volatile market, so many loopholes emerged that “the only effect was to distort domestic petroleum markets.” Over a half century, Joskow notes the paradox that price controls generally corresponded to higher oil prices and lower domestic production.

Joskow demonstrates with graphs and slides how all energy industry sectors have undergone complex regulatory phases, many with ambivalent outcomes. Partly in reaction to this regulation and to increasing demand for energy, energy industries are being restructured and deregulated. In the case of natural gas, Joskow views the changes as a success, in that the “market meets consumer needs in a more efficient way,” with more domestic production and additional supplies coming into the U.S. market.

Electricity, Joskow’s “favorite topic,” is the last sector to be restructured, with the end of utility monopolies in electricity generation, transmission, networks, and distribution. A model of comprehensive reform “has been contentious and slow to evolve,” and with high natural gas prices, the evidence is far from in that deregulation will make electricity cheaper, at least in the Northeast. Some states, like California, “embraced competition, then unembraced it.”

Joskow lauds the success of energy efficiency standards in appliances, but bemoans the stagnation in fuel efficiency for vehicles in the U.S. He says a key challenge for economists is “to persuade policy makers that they ought to increase the price of gas if they’re concerned about vehicle efficiency and alternatives to oil.” He advocates as well replacing EPA regulations with a cap and trade system for various air pollutants, which in Europe seems to be working well.

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