The Federal Energy Regulatory Commission (FERC)—and predecessor, the Federal Power Commission (FPC)—have been a force against competition and market entrepreneurship since the 1930s. Despite the teachings of economics, federal bureaucrats have rewarded incumbency, discouraged rivalry, and inflated ratepayer cost via public-utility regulation of entry and rates.
The infamous natural gas shortages of the 1970s resulted from FPC/FERC mission creep where “just and reasonable” pricing was extended from interstate transmission to wellhead production in interstate commerce. And today, mission creep with electricity subsidizes politically correct, market incorrect renewable energy (predominately wind power) at the expense of both rival energies and consumers.
Laborious rate cases and certification hearings over the decades have resulted in cost maximization and delay at the expense of disciplined expensing and timely investment. “A minor industry of attorneys are kept busy litigating action at FERC,” complained a Federal Trade Commission official several decades ago. “Why taxpayers or consumers are thought to benefit from this escapes me.”[1] Lamented an industry wag: “The BTU value of [FERC] paperwork now exceeds the BTU value of the gas.”[2]
Stated a Wall Street Journal editorial back in 1985, titled “Abolish FERC:”
Given the total success of oil deregulation, it’s hard to believe that anyone today denies the wisdom of getting the government completely out of the energy business. FERC should be decommissioned and a monument erected to remind everyone of the follies committed in the name of the “energy crisis” in the 1970s, with a fond hope that they won’t ever be repeated.[3]
Recently, FERC has become a new front for President Obama’s climate policy. A major new agency priority is socializing the cost of uneconomic multi-billion-dollar transmission projects to get windpower from nowhere to somewhere. The 620-page FERC Order 1000, specifically, has been a boon/boondoggle for getting uneconomic wind generation over the (uneconomic) transmission hurdle. In this regard, controversial nominee Ron Binz promises to accelerate the activism of departing FERC chair Jon Wellinghoff.
The authority of FERC over interstate natural gas and electricity transmission is premised on the “market failure” of alleged natural monopoly. But a review of the historical record, informed by (realistic) economic theory, falsifies this rationale behind both the Federal Power Act of 1935 and the Natural Gas Act of 1938.
The electricity industry crucially supported state and then federal regulation to tame entry and placate investors. The natural gas industry championed state regulation in the 19th century to block “raiders” introducing “processes that can make gas for almost nothing”—and then swung to federal regulation of transmission a half-century later when a new provision in the proposed Natural Gas Act—Section 7(c)—restricted pipeline entry into occupied areas. Consumers, needless to say, had little voice in whole debate.[4]
The “natural monopoly” argument for public utility regulation, the product of economic unrealism, is suspect now as it was then. As Jeff Makholm stated in his recent book, The Political Economy of Pipelines:
As in the case of perfect competition … natural monopoly is an abstract and static ideal, and there is no particular reason to believe that the textbook definition applies to real pipeline businesses any more than perfect competition applies in other markets.[5]
In the real world, imperfect government must be weighted against imperfect markets. Given that industry rent-seeking has been behind state and federal regulation to limit competition and increase profit, is high time to give free markets a chance.
Specifically, as a permanent deregulation strategy, FERC can sanction long-term “exit” contracts between currently regulated parties. Coupled with immediate deregulation of new projects that require voluntary long-term agreements anyway, FERC can shrink toward oblivion.[6]
The demotion of FERC would not only end the disappointing history of traditional public utility regulation of gas and electricity. It would also end mission creep that is increasingly putting FERC at odds with consumers and its own original rationale.[7]
[1] David Scheffman, Director, Bureau of Economics, Federal Trade Commission, quoted in Gas Daily, October 14, 1986, 3.
[2] Gary Willis, Midcon Services, quoted in Gas Buyers Guide, March 21, 1988, 2.
[3] “Abolish FERC,” Wall Street Journal (Review & Outlook), September 18, 1985, p. 22.
[4] Robert Bradley, Edison to Enron: Energy Markets and Political Strategies. Wiley & Sons and Scrivener Publishing, 2011, pp. 500–11 (gas); 511–15 (electricity).
[5] Jeff Makholm, The Political Economy of Pipelines: A Century of Comparative Institutional Development. Chicago: University of Chicago Press, 2012, p. 30.
[6] See Bradley, “The Distortions and Dynamics of Gas Regulation,” in Jerry Ellig and Joseph Kalt, eds., New Horizons in Natural Gas Deregulation. Westport, CN: Praeger, 1996, pp. 22–24; Bruce Stram and Terry Thorn, “Beyond Regulation: A ‘Social Compact’ for Gas and Electricity,” Public Utilities Fortnightly, March 1, 1993, pp. 1–4.
[7] Comparatively lighthanded federal regulation of interstate oil pipelines, which has also been counterproductive, is not reviewed in this post. For a history of such regulation, see Bradley, Oil, Gas, and Government, chapter 14, and Makholm, chapter 6.
