Energy Markets So Easily Gamed They’re Useless

David Cay JohnstonDavid Cay Johnston wrote a really interesting and disturbing article at Al Jazeera last week, New York’s Electricity Market Is a Scam. Rather than have an old fashioned public utility, New York has an electricity market that just so happens to have been set up by Enron. The promises are always the same: a market will make prices cheaper. And the results are always the same: they aren’t. In fact, “Adjusted for inflation, electricity in New York costs almost 17% more than a decade ago.”

Let’s get something straight: businesses are not designed to keep prices low; they are designed to keep prices high. This confusing is what is behind one of my favorite brainless arguments against raising worker salaries, “If you raise wages, the companies will just raise their prices!” No they won’t! If the companies could have charged more before, they would have. Businesses charge as much as they possibly can. The only thing that stops them from gouging is that there are other companies that compete with them. And in a properly regulated market, this is exactly what happens. But businesses do everything they can to avoid competition.

Actual collusion is illegal, of course. In an oligopoly, businesses don’t generally need to collude. They can avoid competition because it is to everyone’s benefit and they know how much it costs their “competitors” to bring their products and services to market. As a result, the regulators of the New York electricity market keep data secret to stop collusion. Or supposedly they do. It seems more like they are trying to keep the data away from the people and their representatives so that the power companies can continue their scam. Because it really is remarkable. New York energy prices have gone up despite the fact that energy supply is always greater than demand. And by a lot, “Its surplus is huge, as much as 63 percent in May, and never less than 4.6 percent, New England Power Coordinating Council reliability reports show.”

What’s more this supposed private data isn’t private. New York Assemblyman James Brennan thought he smelled a rat, so he hired utility economist Robert McCullough to look into it. And McCullough found that by using the disparate data that is released, it is a simple matter to derive all the data. And if he can do it, the companies that are supposedly competing can do it. And they most certainly are, because energy prices in New York should be down not up, by the laws of microeconomics.

Johnston is no liberal. His conclusion is:

My case against electricity markets is not an argument for traditional utility regulation. Monopoly utilities also pose serious economic problems that I have been writing about for more than four decades. But the ease with which the so-called markets are gamed, making them shams in my view, suggests that they are no better and arguably worse.

I know that my libertarian enemies will claim that this just shows that the government should be out of the market altogether. There are two words such people should keep in mind: Silk Road. But this is all just conservative nonsense: the idea markets exist naturally without government. They don’t, and indeed, can’t. And this is not a theoretical issue. The question is how we are going to distribute energy to consumers. We can start with a little transparency.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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