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.”