The Great Texas Blackout of 2021: Is Planning Necessary?

Part 2 of 2. Read Part 1 here.

The  revisionist view of the Texas debacle in Part 1 stands as interpretive history, but it emanates from a very different view of the role of regulation and markets in electricity. It not only brings into focus the question of “Why Regulate Utilities?” (Harold Demsetz) but Why Regulate Electricity?

Electricity is different, PUCT/ERCOT proponents contend. Its physical properties require large areas under coordinated control. And to have a competitive market, central control must be external to the firm and economically managed.

To avoid operational chaos, which would make blackouts the norm, this “commons” requires design principles for coordination and efficiency. Elinor Ostrom, in this sense, supplements or corrects the central-planning challenge posed by Ludwig von Mises and F. A. Hayek.

Central planning by PUCT/ERCOT reflects government intervention to transplant competition into what hitherto was a monopoly situation of franchised-protected utilities generating, transmitting, and distributing electricity. The mandatory open access model of a “network industry” allows retail rivalry where the utility is legally required to open up its transmission to competing suppliers to reach final users. PUCT/ERCOT’s control of the grid is ipso facto central planning for access and price, as retailers come in with their own electricity to sell.

The “non-tragedy of the commons.” Competition in place of monopoly. Decentralized central planning. Texas, in fact, having “an institutional design whose transparent rules enabled decentralized coordination,”[1] was held up to be the national ideal. “The economic vision that informed Texas’s electricity restructuring was grounded in one simple, yet powerful idea,” stated two proponents. “Market processes and competition do a better job than political processes in harnessing private knowledge to reduce long-run costs, increase consumer choice and encourage innovation.”[2]

Free Market Alternative

The Federal Power Act of 1935, Public Utility Holding Company Act of 1935, Public Utility Regulatory Policies Act of 1978, Energy Policy Act of 1992, Texas Public Utility Regulatory Act of 1975, Texas Public Utility Regulatory Act of 1995, Texas Electric Restructuring Act of 1999….

The Federal Energy Regulatory Commission (né Federal Power Commission), Security and Exchange Commission, Public Utility Commission of Texas, Electric Reliability Council of Texas, North American Electric Reliability Corporation, National Association of Regulatory Utility Commissioners….

The above whirlwind of laws and agencies serves as the foreword and afterword of the Great Texas Electrical Blackout of February 2021.

A true free market based on private property rights and voluntary exchange requires repealing or at least amending the above laws, as well as terminating or demoting the above agencies. At the moment of production/transmission/distribution; upstream, midstream, downstream; wholesale or retail, natural gas and electricity would be guided by entrepreneurs, not experts, regulators, and planners.

Explained another way, this reform agenda would remove:

*Franchise protection

*Rate regulation

*Transmission access edicts

*Entry or exit mandates

*Industry-structure limitations

Conclusion

Interpreting and learning from the Great Texas Blackout brings much of the classical liberal worldview into play. Such concepts as undesigned versus imposed order, seen versus unseen, the unintended consequences of government intervention, and regulation as a cumulative process come to the fore.

Particular vigilance is required to separate “contrived,” “managed,” or “market-conforming” markets from the real thing. Terms such as functional planning, decentralized planning, and decentralized coordination suggest a middle way between the free market and central planning. But as Don Lavoie warned, “relatively modest” and “noncomprehensive planning” is still planning, defined as “policy measures that involve concentrating power to shape the economy in a special government agency.”[3]

Similarly, mandatory transmission access is not “deregulation” or “free market” because it introduces “competition” to electricity. Private property rights are a prerequisite to a free market. Without clear definitions, what is government and what is not becomes hopelessly confused.[4]

“The Nature of the Firm” comes into play with the importance of cooperation, not only competition. Economies of scale and scope, vertical/horizontal integration, and price signals are how firms in a free market address the coordination problem. Forced disintegration complicates coordination (per Oliver Williamson), as does low-to-negative pricing from government-enabled competition. And in a highly regulated system, what is not commanded is discretionary, particularly if it is deemed unaffordable (as in weatherization).

In terms of public policy, true electricity deregulation, demoting today’s central-planning approach, represents is-versus-ought and ideas-have-consequences.

Let the debate continue.


[1] L. Lynne Kiesling and Andrew Kleit, introduction to Electricity Restructuring: The Texas Story, ed. Kiesling and Kleit (Washington, DC: AEI Press, 2009), p. 2.

[2] Ibid, p. 8.

[3] Don Lavoie, National Economic Planning: What is Left? (Cambridge, MA: Ballinger Publishing, 1985), pp. 3, 2. He adds (p. 3): “All advocates of planning seem desperately to want comprehensiveness and rely profoundly upon its rhetorical appeal.”

[4] Consider this confused statement from a February 19, 2021, Texas Tribune story: “Policy observers blamed the power system failure on the legislators and state agencies who they say did not properly heed the warnings of previous storms or account for more extreme weather events warned of by climate scientists. Instead, Texas prioritized the free market.”


Robert L. Bradley is the founder and CEO of the Institute for Energy Research.


READER COMMENTS

Frank
May 6 2021 at 11:34pm

What has been missing from all of this, Texas, and my local 2-hour blackout, is to notice that reliability costs money.

-Why can’t users sue public utilities?

-Why can’t users be allowed to pay prices that have something to do with their risk tolerance for blackouts?

This stuff is not that hard.

Rob Bradley
May 20 2021 at 1:01am

The ‘obligation to serve’ is now with the PUCT/ERCOT, not the companies. The utilities have the ‘last mile’ of transmission, but they do not buy or sell power anymore.

Reliability, in other words, has been ‘outsourced’ to experts/planners/regulators. And with renewables crowding out ‘reliables’ under the regulatory rules, what happened in Texas had to be.

In a true free market, reliability would be with private-sector firms. Grade A corporations who would, by contract with folks like you and me, be responsible for price and other terms of service.

Tom DeMeo
May 7 2021 at 8:41am

Just a handful of test questions:

How does a valid grid and last mile services develop without public accommodation? Are you claiming it would be possible to resolve transmission rights one property owner at a time?

How would it be possible to create any competition?

And, even if you could solve these intractable issues, wouldn’t you just replace regulations with a snarled mess of contractual knife fights and legal hair splitting, all of which would make this far more dependent on the role of government?

Robert L. Bradley Jr.
May 7 2021 at 2:01pm

A true free market with full private property rights would demote regulation and regulatory/planning bodies and promote private entrepreneurship. The history of the industry (and theory) suggest that ‘electricity majors,’ ‘natural gas majors,’ and perhaps combinations of the two would prevail to some extent, maybe a large extent. (Market discovery process needed to find out.)

In this situation, collective bargaining would surely occur where organized consumers and other groups would bargain against the provider, maybe even sole provider.

There might be–the owner of transmission would have to decide–an open access situation with rival retailers. But that would be voluntary unlike today.

The retail market today for power is a contrived market, not a real free market. It takes a lot of resources and expense to have a contrived market. That ‘market’ might well go away in a true free market where the integrated major offers a suite of options for consumers as a default and then organized ratepayer groups would bargain for their rates/level of service.

 

Andrew M
May 8 2021 at 3:02pm

I’m not understanding how you envisage this working out. It sounds as if you allow that the grid, or at least the grid in my city, has a private owner who can raise prices as high as he likes, while there is of course no competing grid. True, I could buy a generator for my house, but presumably that is an extremely expensive way to get electricity (even if city regulations allow the operation of a generator large enough to power a household).  I could also move to a city served by a different grid, but that would require making many other changes in my life that would be disadvantageous, so I would only do it in extremis. I could switch to gas for heating, hot water, and cooking, if I haven’t already done so; but that still leaves a lot of electric appliances, including AC and every kind of computer.

The private owner of the grid would seem to have me over a barrel. He can charge me a fortune and get away with providing an unreliable service.

So is your view that:

Bad as this sounds, a regulated system would be worse?
Things wouldn’t work as badly as I have described, perhaps because I band together somehow with other electricity consumers?

You seem not to envisage a system whereby the grid is owned by the state and leased to the highest bidder who contracts to meet certain standards of price and reliability (which, unless I’m misremembering from 30 years ago, is the Demsetz proposal).

 

Rob Bradley
May 8 2021 at 11:19pm

Andrew M: The first step in a transformation would be for the authorities (government) to ‘legalize freedom’ by exiting electricity. Might be phased; might be date certain for it all.

This transition period would be used for consumers to address a single-seller (‘monopoly’) situation with an organized consumer response (‘monopsony’) where attorneys, etc. would represent, say, homeowner associations in a contract on price and delivery services…. The ‘utility’ would have default offerings that might be good enough for some; for others, organization would be key for leverage.

Another approach would be to inventory rights-of-way to see about new wires for a second provider (for precedent, see Walter J. Primeaux).

Where is technology going? What else (other than distributed generation, which is higher cost on the grid) might occur. A market discovery process is necessary.

The upside for all is no more regulatory expense and uncertainty and related cronyism…. And certainly no blackouts with Grade A large corporations on the line.

Andrew M
May 9 2021 at 3:04pm

Thank you for your reply.

Wayne Lusvardi
May 12 2021 at 4:19pm

Failure by Act of God or by Design?  You can’t mix a monopoly system (renewable power) with a market system (conventional power) and expect reliability.

George J Kamburoff
May 19 2021 at 9:58am

Being a former Senior Engineer in Technical Services for PG&E, I see those not in the business have ideas which are completely out of order for power generation and distribution.  It may sound good to extremist politicians, but not to power professionals.

Chris
May 24 2021 at 7:23pm

From a power professionals point of view then, what are the options?

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