Deregulation and deep decarbonisation feat. Edgardo Sepulveda

Decouple

I am joined by Edgardo Sepulveda, a telecoms regulatory economist with an interest in the electricity sector, focused on restructuring and privatization. Edgardo provides a comparative and long-term perspective on the sector. We begin with the first private companies at the dawn of electrification in the 1880’s and the populist push to exert some form of public control to curb abusive pricing, including setting up regulatory commissions to protect the public interest (in the USA, the New York PSC was set up in 1907!). Consolidation from this multi-private operator model to the “traditional” monopoly vertically-integrated firm mostly occurred after World War II (WWII), when the idea that strategic sectors should be publicly-owned via state-owned enterprises (SOEs) drove a series of unifications/nationalizations: Hydro Quebec (1944); ENDESA in Chile (1945); EDF in France (1946); BEA/CEGB in UK (1947), etc. These SOEs expanded the grid and drove electrification. In the US, where public ownership never took off (with a few exceptions (TVA (1933)), the monopoly investor owned utilities (IOUs) also expanded, facilitated by rate-of-return (ROR) economic regulation that guaranteed a stable long-term return on the vast investments needed to meet demand. Starting in the 1980’s, neoliberalism and then environmentalism challenged this structure. Demand, after growing 5% to 6% annually for four decades after WWII, shrank to less than 1% in the last two decades. The neoliberal agenda of competition and privatization was kicked off 1980 in Chile under dictatorship, pushed forward by Thatcher in the UK later in the decade, so that by the California energy crisis in 2000, more than 50% of the USA and 3 out of the 10 provinces in Canada had “restructured”. The idea was that while distribution and transmission remained “natural monopolies” and should continue to be ROR-regulated, generation could be provided competitively and thus “deregulated.” So many vertically-integrated firms were “broken up” (restructured) to allow for a generation market to be created – markets would now set the prices and decide on how much and where to invest. In parallel, many SOE’s were privatized. So what is the verdict? Edgardo and Chris discuss the implications of these two models, for consumers and technologies, in the context of our need to double or triple generation by 2050 to meet decarbonization. Some reports that Edgardo refers to during the podcast, for an even deeper dive: For the USA, Borenstein & Bushnell argue that evidence shows that the restructuring hope was mostly hype in terms of performance: “The U.S. Electricity Industry after 20 Years of Restructuring” (2015) https://energy.ucdavis.edu/wp-content/uploads/2017/03/07-20-2016-DEEP_WP001.pdf Given the above-noted discussion, Edgardo and Chris close of the discussion focusing on nuclear and the available options. A good nuclear-centric analysis of how liberalized markets under-perform from an investment perspective is by Koenig and Kee in “Nuclear New Build - How to Move Forward” (2021) https://nuclear-economics.com/wp-content/uploads/2021/01/2021-01-atw-NECG.pdf, in which they also develop one particular proposed solution (there are many). Edgardo’s Twitter handle is @E_R_Sepulveda Edgardo’s take on the Ontario electricity sector is here https://www.policyalternatives.ca/publications/monitor/power-people and more blogs here: https://www.progressive-economics.ca/author/edgardo-sepulveda/