Internal liquidation

by Chris Bertram on August 22, 2003

John Kay has a good column (from yesterday’s Financial Times) arguing that the crisis on Britain’s railways and in the US electricity supply industry exemplify a more widespread failing affecting both public and private sectors: boosting revenues whilst neglecting the underlying assets

… modern business depends on intangible factors that, for good reasons, are not measured on the balance sheet. Security of supply is one. But the loyalty of employees, the trust of customers and the quality of service are also assets that require investment and depreciate if not well maintained. Reducing these investments enhances earnings. Media companies could focus on producing clones of already successful works – and it would be a few years before their bored audiences turned away. Financial institutions could replace their customer service staff by sales people and call centres. And drug companies could reduce costs and obtain synergies through mergers – and today find their pipelines of new drugs narrower than they have ever been.

{ 25 comments }

1

back40 08.22.03 at 9:13 am

Kay is wrong about the problem with US electricity transmission and likely wrong on all counts.

The problem with US electricity transmission is that it is regulated in a way guaranteed to prevent investment. The allowed returns on investment are lower than can be earned with alternatives. Money flows away from poor investments.

He is also wrong on his main point, that “Determining the right balance between supply security and costs will always be a matter of expert regulatory judgment and political negotiation.” Regulators and political negotiation are exceedingly poor at making such determinations. There is an inherent mismatch between dynamic systems and lumbering regulatory and political processes. They are the wrong tools for such a task.

This point is well demonstrated by the recent outages in the US. There was plenty of power generating capacity but insufficient transmission capacity. Power generation is much less regulated and provides adequate returns on investment. Power transmission is highly and rigidly regulated and does not allow adequate returns. The obvious result, one that industry analysts have warned of for a very long time, was a transmission failure.

His key point, that “businesses that have funded the present at the expense of the future will continue to decline and others will take their place. But there is no similar market solution for infrastructure utilities.” is simply wrong. When there are competitive returns on investment in utility infrastructure money will be invested. Competition is not just a feature of similar businesses, not just direct competition, it is pervasive in all aspects of all businesses. They compete for investment money and quality personnel as much as for customers. This is true for all institutions, not just businesses. Universities compete for endowments, grants, and good staff. Bureaucracies compete for power, influence, budgets and personnel.

There is a political requirement that necessities such as water and power be available to all. The cack handed method used by politicians to achieve this has been to squeeze service providers to keep prices low. In this way they seek to hide the cost to society of providing services to those who can least afford them. To avoid degradation of infrastructure this political and regulatory failure should be ended. Those who need assistance to acquire services at their true values should be given explicit aid rather than starving the service providers. Explicit aid is better targeted and so cheaper for society. This allows more benefits to those who need them by not giving aid to all.

This would have many social benefits. When the price of power reflects its cost then there is an incentive to reduce power usage, to conserve power. This will result in reduced waste, clever efficiency innovations, and for most societies lowered balance of trade pressures and lowered pollution.

Similar results occur when other infrastructure services are priced at true cost. Water can be conserved just as easily as power. Fixing leaks, efficient habits of use, alternative methods and a thousand other clever behaviors will occur.

These are important concepts to grasp as the world develops and the majority of humans now under supplied with power, water, communication and transportation begin to consume a proportionate share of limited resources. The wasteful and inefficient methods of politicized and regulated utilities simply won’t do. Prices must reflect true costs so that people and institutions can make informed usage decisions and follow their natural inclinations to conserve that which is valuable. In this way more people can have access to the necessities of civilization.

It is theoretically possible that a sufficiently powerful and just regulatory system could do an effective job of gathering relevant information and processing it in real time to make sensible decisions, but at present this is not possible. Perhaps in future some machine mind with data streams flowing from all points will be able to do this, but would we trust it?

2

Robert Schwartz 08.22.03 at 4:04 pm

In the Wake Of the Blackout:

Two States Argue Over Cross-Sound Cable

The New York Times, August 19, 2003.

The blackout that fell across the Northeast last week ignited a political dispute over the Cross-Sound cable, a 24-mile electrical line between Connecticut and Long Island set in Long Island Sound’s seabed . . . When the blackout struck, Mr. Pataki persuaded the United States Department of Energy to put the inactive cable into service. Though the 330-megawatt cable was laid in May 2002, Mr. Blumenthal opposed using it because it did not comply with state permits.

That opposition and a court ruling had prevented it from operating until Friday [8/15/03], when it began funneling electricity to Long Island. Since it is geographically isolated, the island has few portals for receiving power . . .

In a Friday morning appearance on NBC’s “Today” show, Mr. Pataki placed some of the blame for the region’s electrical travails on Mr. Blumenthal’s opposition to the cable . . . Yesterday, Mr. Blumenthal sent a letter to Energy Secretary Spencer Abraham arguing that with the emergency over there was no longer any justification for keeping the cable active. He wrote that “in light of the current situation, your order is unlawfully overbroad and unnecessary” and should be revoked before it expires naturally on Sept. 1 . . .

The Cross-Sound Cable, which stretches from New Haven to Shoreham in Suffolk County, had lain dormant since its completion in 2002 because bedrock and other obstacles in New Haven Harbor prevented it from being buried as deeply as permits required. Because the cable did not comply with state mandates, Mr. Blumenthal blocked its operation. Environmentalists and politicians who oppose it have said it could damage shellfish beds and raise electricity prices in Connecticut . . .

Richard M. Kessel, chairman of the Long Island Power Authority, said the cable’s performance during the blackout demonstrated that it is an excellent way to transmit power. It can serve about 330,000 homes “I challenge the attorney general of Connecticut to show me and show the world how the operation of that cable negatively impacted the environment over the weekend,” Mr. Kessel said. “The cable has operated. It has carried up to 300 megawatts of power. That’s the issue. What’s the excuse going to be now?” . . .

Taft bans Lake Erie drilling

The Columbus Dispatch, Wednesday, August 20, 2003:

Drilling for oil and gas under Lake Erie is now banned under an executive order of Gov. Bob Taft . . . [which] applies only to parts of the lake within Ohio . . . The Canadian side of Lake Erie has 550 gasproducing wells . . .

The order prohibits the Ohio Department of Natural Resources from issuing any permit . . . for removing oil or gas from . . . the lake bed through 2006, the end of Taft’s second term . . .

The Ohio Geological Survey estimates that the Lake Erie Ohio zone has more than 1.1 trillion cubic feet of natural gas — equal to all the state’s onshore reserves . . .

Word of Taft’s directive came on the eve of a visit to Columbus by U.S. Secretary of Energy Spencer Abraham, who will brief Ohio officials today on the power failure that left millions of Americans and Canadians without power Thursday . . .

When you try to explain underinvestment, NIMBYism should be the first hypothesis.

3

Prometheus 6 08.22.03 at 4:04 pm

The problem with US electricity transmission is that it is regulated in a way guaranteed to prevent investment. The allowed returns on investment are lower than can be earned with alternatives. Money flows away from poor investments.

I’m really not understanding why people are trying to push this viewpoint.

When utilities were fuly regulated they received plenty of investments. It just wasn’t from the high-rollers. It was from people who needed a sure, predictable return on their investments and steady dividend payments. People invested in utilities for their retirement, and would almost inevitably enroll in the automatic dividend reinvestment programs.

It would be really good if everyone realized there’s such a thing as “enough.” To suggest that returns on investments in regulated monopolies have been insufficient is simply thevoice of greed.

4

back40 08.22.03 at 5:12 pm

The problem with regulated monopolies is that they are inefficient, expensive and unresponsive to change. They are like state bureaucracies and have no incentive to produce a good product at a fair price or offer good service since they have a guaranteed rate of return no matter how poorly they manage the system. The owners get paid, the investors get paid, the employees get paid but the customers get screwed.

Such monopolies become increasingly degraded over time. They fail to innovate since there is no incentive for improvement and so the society as a whole is dragged down. Worse, such monopolies become incapable of innovation since they attract the type of personnel comfortable in such institutions. They are time servers that seek only to endure. They are risk averse and only interested in avoiding blame. This is perhaps a more insidious form of greed, the indifference of the civil servant with tenure.

It is difficult to find an effective mix of enterprise and regulation for what seem to be natural monopolies. Power generation is easy to deregulate and gain the advantages of competition and innovation, but power transmission is another matter since it makes no sense to have multiple, competing transmission infrastructures. There are some very smart and knowledgeable people working on this problem and they need an informed polity to support them. It seems unlikely that this will happen though since there are too many political and ideological opportunists, sharks attracted by blood in the water. The combination of would be regulators and political opportunists spells doom for reform efforts. This isn’t the first time this has happened and it won’t be the last.

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Prometheus 6 08.23.03 at 6:38 pm

back40:

The problem with regulated monopolies is that they are inefficient, etc…

Hm. Statements rather than arguments.

the investors get paid…

I take it you’re not pushing the inability to attract investors and poor rate of return angles anymore?

Such monopolies become increasingly degraded over time. They fail to innovate since there is no incentive for improvement and so the society as a whole is dragged down. Worse, such monopolies become incapable of innovation since they attract the type of personnel comfortable in such institutions.

Like Bell Labs was, right?

It’s simply not that case that this is something fundamental to the nature of regulated monopolies. In any case you’d be able to point out you’d find it was bad management decisions that cause the problem.

Bell Labs (pre-ATT split up) is the idea example. They had a culture that fostered innovation. The stuff that came out of their laboratories changed the nature of our lives. And they were the research arm of a regulated monopoly.

6

clew 08.23.03 at 7:37 pm

Also, anecdotally, the public utilities in my necks of the woods – two counties in WA – are, although not *nimble*, willing and able to change. But this region is still vaguely public-good-minded; a large number of people pay a mild amount of attention to the social, technical, and environmental arguments around our power, and the bulk of opinion sways the behavior of the utilities. I don’t know whether social or electoral power is stronger. I would guess social in the rural county, electoral in the urban.

The enormous consumer telephone bureaucracy is pretty damn dim, though. I’m not assuming that this is because private-profit enterprises are afraid of destabilizing technological innovation. I think it’s just because these particular ones are bigger and less socially interdependent.

7

back40@geek.com 08.23.03 at 10:23 pm

“I take it you’re not pushing the inability to attract investors and poor rate of return angles anymore?”

You are confusing regulated monopolies with regulated industries. The electrical transmission industry is not a monopoly.

“Bell Labs (pre-ATT split up) is the idea example.”

At one time they made some innovations and seemed gee-whiz, but after deregulation they withered due to competition from more innovative organizations. They lost personnel to more creative labs and had the typical bloated cost structure and entrenched bureaucracy that prevented them from adapting. Innovation since deregulation has proceeded at a blinding pace by comparison, Bell labs is indeed the perfect example of an inefficient, expensive and unresponsive monopoly organization unable to innovate.

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Prometheus 6 08.23.03 at 10:41 pm

“I take it you’re not pushing the inability to attract investors and poor rate of return angles anymore?”

You are confusing regulated monopolies with regulated industries. The electrical transmission industry is not a monopoly.

I’m not confusing anything. There’s no functional difference. And you’re not pushing the inability to attract investors and poor rate of return angles anymore, right?

As for Bell Labs, I’d classify transistors and lasers well beyond the “gee whiz” category. There’s a difference between making refinements and making fundamental change, and I haven’t seen a pure research facility anything like Bell Labs in the cutthroat competition economy, nor anything like their innovations.

I’m not saying being a regulated whatever is a requirement for innovation. I’m saying it’s not a obstacle as you claim.

9

back40 08.23.03 at 11:38 pm

And yet that same organization withered away when competition was introduced. They were too expensive, too slow, too unrepsonsive to change and in the last analysis ineffective.

This is unacceptable for a public utility since the people are paying for it. They deserve better products at lower prices with greater availability. Monopoly systems consume too many resources and serve too low a percentage of the population.

When we stick our heads out of our provincial caves and consider the world as a whole we see that while some live in luxury and leisure others are not so well served. The farther away we look the more this is true. The majority of the world’s people lack basic services. We can’t really build walls around our little kingdoms and disregard their circumstances.

“These are important concepts to grasp as the world develops and the majority of humans now under supplied with power, water, communication and transportation begin to consume a proportionate share of limited resources. The wasteful and inefficient methods of politicized and regulated utilities simply won’t do. Prices must reflect true costs so that people and institutions can make informed usage decisions and follow their natural inclinations to conserve that which is valuable. In this way more people can have access to the necessities of civilization.”

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Prometheus 6 08.24.03 at 1:58 am

Dealing with your first paragraph last:

Monopoly systems consume too many resources and serve too low a percentage of the population.

A monopoly by definition serves the entire market for all practical purposes. And I’d need an example to understand your assertion that they consume too many resources. I have no idea what you base this assertion on.

When we stick our heads out of our provincial caves and consider the world as a whole we see that while some live in luxury and leisure others are not so well served. The farther away we look the more this is true.

Actually we can see that quite well within our cave. And the gap, in the USofA with its amoral market and profit driven decision process, is growing. When you speak of looking further away, aren’t you suggesting expanding that very decision process, that very amorality? Why wouldn’t you expect it to have the same effect there as here…to increase the gap between haves and have-nots in the very areas that can least withstand it?

If you truly oppose this trend, you should truly oppose practices that enhance it before your very eyes.

Finally (because it’s a different topic, actually) Bell Labs is now Lucent, and has withered to the degree that you judge it financially rather than technically (which is how innovation should be judged). Pure research is always the most profitable option to society long term, and the least profitable option to those actually doing the research. Because the current market driven mentality has no concept of “enough” we will always withdraw from real innovation in favor of mere adaptation. Our nation—the world as a whole, in fact—is ill used by this attitude.

Do not assume I am against capitalism. I favor it strongly…I just oppose letting it drive us.

Since you’re not addressing poor rates of return or the practical difference between a regulated monoploy and a regulated industry, am I to assume you yield on those points?

11

back40 08.24.03 at 6:16 am

Monopolies have no competitors, but they do not serve the whole population and do not serve them well. Telcos are a good example of this. Since break up of the Bell system more people can afford more service, and do more things with the service.

The gap is reported to be decreasing world wide, but not evenly due to local variations. There is every reason to believe that laggards could do better. But, a more meaningful measure is of improvement in real terms, what is sometimes called capability analysis, and that is rising except in areas (such as Africa) that have special circumstances or that have had political/social/economic collapse due to failed ideologies.

That gap is closing because the poorest are getting richer faster than the rich. It’s uneven at every level. Some states are doing better than others, some regions within each state are doing better, and some people within each region are doing better. When you look at the whole picture things are looking up, but you can always find a bounded sample that tells a different story. China and India, where vast numbers of people live, are doing much better, but other states are less successful. The system as a whole is positive sum but there are still losers. Too many. There always will be some, but the key is to reduce the period of suffering after loss, to get people back up quickly.

It’s heartbreaking that everyone can’t have everything all the time, not yet, but the world as a whole is improving and the methods for continuing and accelerating the process, the methods of the past 20 years, are working. It takes time, usually more time than best case estimates, in part because some people are grumpy and uncooperative about change or are wedded to belief systems that hamper them.

All this improvement needs to be efficient. Power, water and every other service consumes resources to give benefits. Efficiency means fewer resources are consumed. Increased productivity is another way to measure efficiency. Among the best ways to gain efficiency, improve productivity, are to allow choice among providers with prices reflective of true costs – not skewed by inappropriate regulation, political interference, subsidy or other transfers that conceal costs – so that people can make sensible decisions about consumption. Under these conditions providers work diligently to improve themselves and consumers conserve.

This matters at each social level, from communities to nations to the world as a whole. It isn’t inappropriate to think in global terms. Resource consumption, and waste generation, really are global issues. There is a multiplier effect too in which techniques spread, people learn from one another. But, they can learn bad techniques as well as good. A significant amount of the world’s current poverty is a result of the wave of bad techniques that were adopted in previous decades by some states.

One of the most valuable resources, one which is often wasted, is the human mind. Unemployment is pure waste, all consumption and no production, but it’s the waste of those minds more than hands and backs that is tragic and expensive. Every aspect of society is diminished when a large percentage of the population is not engaged with the affairs of society. Systems that engage and employ larger percentages of their populations are more productive, more efficient, and altogether smarter. Universal suffrage means more than having a vote, it means having useful work, a voice, and a piece of the action.

Engaged, employed, smart societies with open and transparent systems consume fewer resources but get greater benefits. When Power, water, fuel, food, communication, education, transportation and health care are provided by those smart people to each other at prices that reflect true costs then those services will be efficient and will continuously improve.
—-
Both monopolies and regulated industries are inefficient and both could be regulated at any level of return, but in practice the monopoly is a safer investment since when it fails, everything fails and the regulators and politicians can’t so easily evade responsibility for that failure. When responsibility is not clear, when no one is accountable, when responsibility and control are divided, then systems are more risky. Regulated industries are more risky for investors yet don’t have returns appropriate to their risks. They have all the problems of regulated monopolies but not the benefits. Politicians can game them for political benefit and hope to evade blame when they fail. Regulated monopolies are less risky for investors. Both are bad for consumers and society as a whole.
—-
Lucent should be judged on its performance since that’s what’s of interest to society. They have to do good work and give good value. There are many, many companies that seemed wonderful at one time… until they met better companies. Sometimes competition comes from start ups (IBM/Wintel), sometimes from a foreign land (Ford/Toyota) and sometimes it comes from exposing a protected monopoly to real world conditions. That’s why we expose them. It’s like making that 30 year old child get off the couch and get a job. All parties are improved.

12

Jack 08.24.03 at 11:48 am

back40: But how do you regulate it in a way that doesn’t cause the small problem of power blackouts for 50 million of the richest people on earth? It is just possible that a competitive industry might deliver cheaper power to those who need it but would any saving, especially after considering the costs of duplicated biling systems, diseconomies of lack of scale, etc. be worth the cost of this kind of disruption?
Also, even by your analysis the crisis is the result of the latest changes in regulation. I submit that

A)these changes were a significant deregulation in the sense that you seem to be in favour of
B)noone seriously thinks that immediate total deregulation is either realistic, desirable or achievable.

Given that what are your practical suggestions?

In any case there is no contradiction between Prof Kay’s claims and the claims you make in your first post.
You say that people try to make the most money and somehow that will all come right in the end because every one else makes mistakes (unlike the market in 1999 eh?). John Kay says that accounting is imprecise or ignores some things but that peoples bahaviour about it is not. Both can be true. I think you just don’t like where you think he might be headed.

Also how come it hasn’t worked out for the Russians or US cellphone customers yet?

13

Prometheus 6 08.24.03 at 2:52 pm

back40, the anchor in the second paragraph is mere formatting – the tag has no address. I was hoping the statement in it was documented by something on the other side of the link because it;s the first time I’ve seen that claim made.

At any rate, we’re disagreeing on fundamental principles, you and I. Or maybe fundamental perceptions. I counter your claim:

Since break up of the Bell system more people can afford more service, and do more things with the service.

with a 2002 report by the Consumers Union that I posted in another thread here.

Local telephone charges have increased 17 percent since the Telecommunications Act became law.(3) Local phone bills are expected to go up another 5 percent in July 2002 as the result of ongoing deregulatory policies at the Federal Communications Commission (FCC) to raise subscriber line charges.(4)

In 1996 there were eight major companies providing local phone service, each to a different area of the country. Today those eight companies have shrunk to four as a result of massive consolidation. The two biggest companies, Verizon and SBC, each control 30 to 40 percent of the nation’s local phone business. Local phone monopolies have skillfully used their size and influence to avoid opening their markets to competitors as the Telecommunications Act intended.

Meanwhile, the nation’s largest long-distance providers – AT&T, MCI Worldcom, and Sprint – have either raised or are planning to raise their basic long-distance rates in coming weeks to as much as 35 cents a minute during the day from about 26 cents a minute in 2000. They are also raising evening rates from about 16 cents a minute to as much as 30 cents, and weekend rates are rising from about 12 cents to as much as 19 cents.(5) These price hikes come at the same time that long distance companies are saving $3 billion a year for the cost of connecting calls to their customers. Long-distance companies have largely failed to expand their business into local phone markets, except in New York where regulators have intervened to promote competition and reasonable prices.

Technically, in the six years since the Telecommunications Act became law, long-distance rates have dropped 14 percent.(6) However, that figure hides the inequitable distribution of costs and benefits to consumers. When long distance companies lowered their per-minute rates, they increased their monthly fees. Some of the most popular calling plans charge a few pennies for each minute of long distance calling. But the plans also charge a tall stack of fees, including monthly service charges, universal service fees, and in-state service fees for people in certain states. At least one company has even started charging a fee for its property tax.

The increase in fees has left many consumers paying more, not less, for long distance

THIS is the result of deregulation, my friend.

14

back40 08.24.03 at 6:23 pm

I’ll try again, I seem to have omitted a close quote on the URL.

The gap is reported to be decreasing world wide.

It’s an Economist article, subscription required, about an essay by Stanley Fischer about how the poorest people in the world are getting richer faster than the rich, and that those that liberalize the most benefit the most, just as theories predict.

Jack: The part of the power system that failed, transmission, has not been deregulated the way power generation has been deregulated. It is still highly regulated by a confusing and contradictory set of rules that vary by region and are gamed by politicians. Industry analysts had warned of this for a long time, it was expected, but the politicians didn’t have the courage to act. Developing workable policies is really complicated due to the confusion of initial conditions. In the coming weeks we’ll see a number of proposals by some really smart people. I’m not one of them but I’ll report their ideas if the opportunity arises.

“…would any saving, especially after considering the costs of duplicated biling systems, diseconomies of lack of scale, etc. be worth the cost of this kind of disruption?”

No, disruptions are too expensive and damage the social fabric as well, but the outage wasn’t caused by deregulation, it was caused by bad regulation. It’s hard to develop good regulations due to political pressures.

Economies of scale are a wash when all of the players are big enough to realize them. Getting big beyond big doesn’t yield greater economies and can even go the other way. Centralization is more expensive than distributed control in a large number of situations so long as a minimum size is achieved that makes effective use of assets employed.

Jack: “In any case there is no contradiction between Prof Kay’s claims and the claims you make in your first post.”

Yes there is.

Kay says: “Determining the right balance between supply security and costs will always be a matter of expert regulatory judgment and political negotiation.”

I say that expert regulatory judgement and political negotiation caused the problem. I have less faith in experts and no faith in politicians since they have done so poorly at so many things for so long in so many places. The more powerful and centralized they are the more harm they cause.

I go further and bring up the ethical aspects. Systems controlled by regulatory/political methods are wasteful and expensive, an impoverishment of the population served, but it is also an ethical failure in that scarce resources available in insufficient amounts are squandered. Looking forward to world development which is in progress it seems that we should be good world citizens and not waste resources. By using bad technique we are wasteful and set a bad example, in effect export bad techniques to vulnerable new societies, another sort of ethical failure.

Jack: “how come it hasn’t worked out for the Russians or US cellphone customers yet?”

Russia has a lot of damage to repair. It won’t happen soon.

US cell phone systems are an interesting subject. There is great turmoil as technological innovation occurs. It’s early days where multiple competing methods and providers are proving themselves. Some use one technique and some another. Both the players and the game are evolving. Some insight can be gained by comparing this situation to previous situations such as switched circuit/packet, PCs, automobiles, trains etc. CDMA/TDMA are just the tip of what will be a robust competition between techniques, many of which are still in development. In time, if this situation follows the usual script, clearly superior techniques will emerge, be recognized and claim the majority of implementations in a mature industry.

Competing standards as well as competing companies create confusion in the early days of an industry but the temptation to interfere should be resisted since experts, politicians and regulators often pick the wrong standard and harm societies. Regulatory interference often results in large investment in technologies that are obsolete before the ink dries on the regulations. This saddles societies with large debts for inferior systems. It is only after industries have matured that good regulation can help clarify details of standards.

——

“Local telephone charges have increased 17 percent since the Telecommunications Act became law”

This is because they had been subsidized, not because costs have increased. There is still subsidy for residential use in that the amount charged to businesses for equivalent capability is higher. The cost to society as a whole, the relevant measure, has declined while services have blossomed in capability and variety. This is the classic example of political manipulation to conceal subsidy. We need to help those who can’t afford essential services, but we should do this explicitly with well targetd aid rather than subsidy which enriches those who don’t need help and deforms the industry. We have to look at whole systems and longer time frames to make useful analyses. When the price of a service reflects its true cost then people can make better decsions about consumption. This rewards capable providers and conserves resources.

15

Prometheus 6 08.24.03 at 7:12 pm

I suppose I’ll have to grab a copy of The Economist unless you can tell me the paper they are discussing. I’d rather read the original anyway since the only spin I trust is my own.

“Local telephone charges have increased 17 percent since the Telecommunications Act became law”

This is because they had been subsidized, not because costs have increased.

I certainly agree the cost of providing the service hasn’t increased to that degree. What I don’t agree on is the idea that the telcos made insufficient profit.

If the idea behind the rate increase was to match the rates to the true costs, then business rates should have fallen while consumer rates increased. Both have increased.

No concept of “enough.” This is not a problem limited to corporations, but it is the problem.

16

back40 08.24.03 at 8:41 pm

“Globalisation and Its Challenges”. By Stanley Fischer. AEA Papers and Proceedings. American Economic Review, volume 93, number 2, May 2003.

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back40 08.24.03 at 8:53 pm

18

Jack 08.25.03 at 1:38 pm

Back40 can you imagine a circumstance under which there would be no regulation in the power industry?
Indeed can you name a market which works and isn’t regulated?
Markets can provide feedback, accountability and flexibility but they do not have a monopoly on these things. Singapore is highly planned as are most corporations.
Furthermore the Russian example shows that the necessary changes are not necessarily what you think they are and the cell phone example shows that the benefits are not immediate Slovenia is richer than the poorest EU countries already for example.
As for the mobile phone argument, there may be jam tomorrow but on the other hand US mobile phone companies might end up like Japanese PC makers or Banyan and Novell.
Your outcome is plausible but believing that it is inevitable is theology not science.

19

Prometheus 6 08.25.03 at 1:48 pm

Thanks for the link to the original speech transcript. I really prefer source material and I’m still reading–globalization is a topic I need to get more current on.

About the Economist article that was based on this speech, did they note the opening statement in the review of poverty data?

For some time it was accepted that the proportion of people living in poverty in the world has been declining, but their absolute number has been increasing. This refers to the World Bank’s measure of absolute poverty, defined as living on a real income of less than one dollar a day. There is no consistent fully reliable set of data reflecting longer-term developments in poverty.

That statement would explain why I’d never seen anyone claim the gap between haves and have-nots is shrinking. And Mr. Fischer correctly emphasizes that he’s working with “only estimates”… did the Economist make that point as strongly?

The best support for the statement I find so far is:

Inequality among national average incomes appears to have been increasing for at least 400 years, since before the rapid increases in economic integration that took place in the nineteenth century. However, this long-term rise in inequality among national average incomes seems to have slowed during the past 20 years.

I guess it’s good that the gap is widening slower than it has, but that hardly supports a claim that it’s being reduced.

Again, though, an interesting read.

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back40 08.25.03 at 5:16 pm

Jack: “can you imagine a circumstance under which there would be no regulation in the power industry?”

All industries, all human behaviors, everywhere and everywhen are regulated. The only issue is the quality of the regulation, whether it helps people live well together or hinders them.

Prometheus 6: “…this long-term rise in inequality among national average incomes seems to have slowed during the past 20 years.”

This was the focus of the Economist article. It highlighted Fischer’s two charts, Growth in GDP per head” and Growth in GDP per head, proportional to population. When people, rather than nations, are graphed the large populations of China, India and a few other populous nations that have had strong growth since liberalizing and globalizing change the picture completely.

When every nation counts as one point on the chart it appears that inequality is rising, perhaps more slowly than before but still rising. But this is misleading since one small African nation with a comparatively tiny population has the same graph weight as China. When the graph points are weighted by population it becomes apparent that poor people are getting richer faster than the rich even if poor nations, each counted at the same weight, are still losing ground.

The balance of the Economist article explores the reasons that some nations grew slowly or lost ground and what they and EU/US can do to help. They refer to Fischer’s call for more aid and mention trade restrictions that harm poor nations.

21

Henry 08.26.03 at 5:42 am

The gas and electric utilities were deregulated several years ago in my neck of the woods. I currently have exactly one choice of utility for each, which makes both of them unregulated monopolies. The only thing holding my rates down is state law limiting increases for existing customers. If I had changed to the one eletricity competitor a few years back, I would now be paying about 20% more, as they ceased doing business and I would have had to return to my previous electric company without the rate limitation (as I would no longer have been an existing customer.)

22

Prometheus 6 08.26.03 at 6:00 am

back40:

It’s been a bit hectic today, and I’m not trying to be obstinant. But I can’t see any value added to that graph on page 13 (the concepts represented by it by, actually) by adding the population of each nation. I’m not sure someone else’s comments are an appropriate place to go into why.

At any rate, regardless of the intellectual underpinnings of the movement, I still observe that on the ground deregulation has made way for what looks supiciously like profiteering. It’s the economic equivalent of neocons winning elections with centrist rhetoric.

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back40 08.26.03 at 6:30 am

Henry, electricity generation and transmission is highly diverse. The utility that you have an account with is a reseller of purchased power generated by others and transmitted by others. This is true even for utilities that also generate and transmit power, it’s the nature of the business. Excesses are sold into the grid and peak needs are bought from the grid. This is more sensible than maintaining sufficient capacity to satisfy peak needs and being idle much of the time when needs are low. This is how the recent outage could have such a wide effect. All of those states and Canada are linked in a codependent network that is owned by a diversity of entities.

It’s true that state regulations largely determine prices to consumers, that’s part of the reason that there are power outages. Regulators set prices based on political pressures rather than true costs, change regulations without considering network effects, and generally create an atmosphere of unreason which makes it impossible for providers to plan.

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Ken 08.26.03 at 3:42 pm

“Power generation is easy to deregulate and gain the advantages of competition and innovation, but power transmission is another matter since it makes no sense to have multiple, competing transmission infrastructures. “

It makes just as much sense as having multiple competing power plants. Or multiple competing automobile factories.

“Back40 can you imagine a circumstance under which there would be no regulation in the power industry?
Indeed can you name a market which works and isn’t regulated?”

Sure. The computer hardware market. Rapid consistent improvements in quality and price year after year after year. With no significant regulation outside the FCC’s radio interference requirements.

The computer hardware industry blows everything else out of the water in terms of improving quality and price over time.

Also, airline deregulation had a positive effect on ticket prices. Ridership increased so much (thanks to the vast increase in the number of people that could afford tickets) that, up until 9/11, the government owned and regulated airports couldn’t keep up with demand, and couldn’t move all the planes full of passengers fast enough.

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Prometheus 6 08.26.03 at 4:11 pm

I’m going to assume for a moment that history has shown that regulators will set inefficient prices because o political pressures. I am also going to assume that history has shown that the market will be manipulated if it is manipulatable.

Will our deregulation proponents so stipulate?

Since we’ve all expressed concern about the market being well served I’d like to know:
1-what does it mean to serve the energy market well?
2-what is necessary to insure the more rapacious among us cannot game the market to the disadvantage of consumers?

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