Impressions

Utilities: Regulate or Deregulate

By Tim Holland

It seems to me that there are some elements of our society that should not be regulated and some that definitely should and then there are others that probably should be blended. Over the past 25 years or so we have been on a deregulation binge to get the government out of everything and we have probably gone too far in some areas.

The airline industry is certainly one that has thrived in a deregulated environment and low fares and the ability to get from one place to the next quickly, despite delays, have been popular benefits. However, we now seem to be brushing up against safety issues that each airline in not able to solve on its own. There is also the issue of who should own and operate an airport or for that matter any transportation infrastructure. Recently we had the issue of a Dubai company taking over the operations of a number of port facilities in the United States which raised the awareness of the deregulation and outsourcing that has been occurring out of sight of the general public.

Water, electricity, and gas operations have been merging and are being bought and sold on a global basis. The local water company is no longer local but is probably owned by another company located in a different state or region or even another country. Is this really a good approach for the country?

The argument for deregulation has been the hateful “win / win” scenario presented by those who stand to “win” the most, especially in the short term. Those who make the case for the deregulation of utilities continually proclaim economies of scale as a way to bring down costs for the consumer, which, of course, is a requirement that elected officials and regulators have come to believe is their primary role in representing the electorate. The problem is it appears that the promised savings are not being passed to the consumer and in a recent analysis of the cost of having a private, deregulated utility provide the service as opposed to having a regulated company as the provider, the regulated one is proving to be the one benefiting the pocket books of the consumer.

There is the argument that regulated utilities create an uneven playing field by subsidizing the consumer and by demanding that the cost remain low resulting in capital investment being sacrificed or higher taxes being needed to maintain the subsidy, while a deregulated one, through efficiencies, would be able to accomplish both low cost and, by having greater access to capital markets, be able to provide the capital for repair, maintenance and expansion. However, the counter argument that is emerging is that when deregulation occurred prices did not drop as promised and the infrastructure of the country has deteriorated rather than improved. The promises of the deregulation of public utilities have not been kept or realized and a case could be made that funds that could have been used on repair and maintenance and expansion have actually gone toward attempting to prop up stock prices (buybacks), and have been used to cover merger and acquisition expenses. The promises of deregulation of public utilities have simply not materialized.

Deregulation has also produced some unintended consequences. Corporations made the case that they needed to be bigger as the economies of scale would benefit the consumer’s pocketbook, which does not seem to have occurred, but did the deregulators really envision our critical infrastructure coming under the control of non–US companies? Here again the deregulators argued that we are at peace with Germany and France and Italy and England and Japan not to mention our friends in the Persian Gulf. Although there is not a name in the list we haven’t been at war with at one point or another in our history. The idea of a German company owning an automobile company or a Japanese company owning a movie studio or a British or Chinese company owning a bank seems pretty reasonable but having them own a US utility with a few nuclear power plants or control the drinking water supply for a major metropolitan area or a portion of our electric grid – well – is that really a smart thing for any country to do? If we made an effort to own and control those same facilities in Russia, China, Saudi Arabia, etc., would we be greeted with open arms?

So have we gone too far in deregulating some of our critical infrastructure? Again, deregulation, either partially or fully, may work extremely well in some areas of our economy, be it banking, insurance, transportation, telecommunications and other related industries, but shouldn’t we be a bit more careful when it relates to a country’s life support systems?