Economics

One of the primary justifications of privatization or deregulation is to decrease costs, because of the confidence that private organizations develop more cost-efficient systems and operations. Privatization also promises a wide array of consumer choices, diminished market power, and enhanced infrastructure performance. Because of these attractive promises, the U.S. electricity industry underwent a wide range of privatization in federal and state levels. I disagree, that privatization or deregulation has provided major economic benefits of lower electricity prices and controlled market power to society, because deregulated prices continued to increase in comparison with regulated prices, the free markets do not control market power and cost-effectiveness, and that when firms are fewer and workers are weak in bargaining power, privatization can even diminish social welfare.

I disagree, that privatization or deregulation has provided major economic benefits of lower electricity prices and controlled market power to society, because deregulated prices continued to increase in comparison with regulated prices. Using peak-load pricing, the costs of capacity are passed to peak users, and this makes electricity production more efficient, because extra capacity is paid only by those who drive capacity up. At the same time, peak hours determine necessary capacity, so that off-peak consumption can boost without any increases in capacity. Is this what is happening in the deregulated electricity industry No, because evidence shows that power traders and deregulated generators were holding back low cost power during peak periods, and they are also controlling the bidding process to increase prices, such as what happened during the 2000 electricity crisis. When power traders and deregulated generators have become fraudulent, they would not care if electricity prices are low, because it will benefit them more when prices are high.

The free markets do not control market power and cost-effectiveness, because privatization has led to the rising concentration and dominant firm behavior in the U.S. electricity sector. Private companies promote concentration of market power because they can take advantage of the Federal Energy Regulatory Commissions (FERC) permissive merger and acquisition policy. This means that they are increasing their vertical and horizontal integration, which allows them to control electricity prices. The market also failed to become cost-effective, because the industry has been unable to create a pricing system and set of incentives that will lessen discriminatory pricing and service quality problems. Deregulation pricing models do not protect consumers from price manipulation.

Finally, when firms are fewer and workers are weak in bargaining power, privatization can even diminish social welfare. The cost-efficiency improvements that some deregulated industries stress can come from lower wages or layoffs. Studies showed that deregulated firms may be more cost-efficient than government-owned firms, only if the lack of Pareto improvement is ignored. In reality, when there are few firms competing in the market and when workers are de-unionized and have lost bargaining power, these cost-efficiency improvements are traded off with lower social welfare increases.

Privatization has not delivered its promises. Though it can demonstrate economic gains of cost-effectiveness, to some extent, these gains are undermined when electricity prices continue to rise, the free markets do not control market power and cost-effectiveness, and when privatization can even lead to diminished social welfare.