Economist Robert Kuttner summed up this feeling when he contended that deregulation "doesn't help the consumer, it just helps the consumer get gouged." The problem, he noted, is that industries such as aviation and electricity are capital-intensive. Consequently, it is difficult for upstart competitors to compete with established market leaders. Over time, competition is non-existent and large firms can charge monopolistic prices.
Indeed, consumer groups' calls to re-regulate California's power industry and the Port Authority of New York and New Jersey's plan to limit peak-hour flights into LaGuardia Airport suggest that the nation's more than three-decades-long effort to deregulate a host of basic industries may have run its course.
But before localities impose new limits on airport operations or state governments rush to re-regulate power companies, it's worth asking whether critics have diagnosed the problem accurately and if the proposed cure is worse than the disease.
In California, for example, rising prices for power may be simply a problem of supply and demand. That is, the supply of power in California has not kept pace with large increases in demand. Moreover, available supplies seem to be concentrated in the hands of a relatively few firms. In such situations, prices are likely to rise dramatically.
In contrast, states with more ample power supplies are having more positive experiences with power deregulation. Pennsylvania, for instance, chose not to move forward until state officials were sure there was enough capacity to ensure truly competitive markets and that more than a handful of firms controlled the available capacity. This appears to have led to a modest drop in electricity prices.
Similarly, the problems in aviation deregulation were the target of a report by a Transportation Research Board panel of experts in airline deregulation. The panel noted that while airlines (like telephone companies and many utilities) charge higher prices during periods of high demand, neither airport operators nor the Federal Aviation Administration, which operates the nation's air traffic control system, can use prices to allocate scarce runway and airway capacity. That flaw, the report noted, virtually guarantees congestion at the most desired times and places.
The panel also noted that while deregulation allows airlines to fly anywhere they choose, some airlines use their monopoly control over gates to keep competitors out of lucrative markets. The solution, the committee noted, is not necessarily more regulation but stricter enforcement of antitrust laws.
It is also worth remembering that the regulatory systems we have scrapped in the past two decades were riddled with flaws and problems. The literature on regulation of basic industries is almost universal in its conclusion that it is difficult, if not impossible to prevent the "capture" of those systems by the interests they are supposed to regulate.
Why does this happen? At the risk of overstatement, regulated industries and their largest customers have great incentive to pay close attention to regulators' activities. Meanwhile, the vast majority of people and firms generally don't have the inclination or expertise to do so. As this plays out over time, regulated industries tend to become less and less efficient until problems become too obvious to ignore.
Recall, for example, that in the era of airline regulation, airlines flying in one state, which were not subject to federal oversight, charged much less than those flying routes of the same distance that crossed state lines and, therefore, were subject to federal regulation. Similarly, large power users, such as auto manufacturers in the Midwest, often found that it was cheaper to build their own power plants than to buy power from regulated utilities.
This is not to say the current systems are perfect. Rather, it's to underscore two important points. First, when deregulating capital- intensive industries, it's critical that legislators and regulators pay careful attention to ensuring that real markets--markets with several firms and a reasonable balance of supply and demand--replace regulatory systems.
Second, contrary to the rhetoric that accompanies most power deregulation de-bates, deregulation will not immediately produce significant savings for everyone. Rather, well-designed deregulatory programs can lead to tremendous long-term savings--sometimes by spurring the construction of badly needed new capacity, as appears to be the long-term outlook in California. Prices, however, are likely to rise for those previously subsidized by the old system, such as local telephone users or rural communities with limited air service. The public policy goal, therefore, should be to seek such gains while using some of the savings to ensure that the changes don't harm those least able to cope.
