Regulatory Predictions and Green Mountain Energy

I wrote the following at my old blog on June 1, 2004.  In the summer of 2006, I met with the general counsel of Green Mountain Energy, the largest retailer of clean energy in the U.S.  I asked him if regulation was an obstacle to increasing the market for clean energy.  He acknowledged that it was an enormous obstacle and that regulatory agencies in every state consistently favored the established, mostly coal, electricity producers.  This is why Texas, the least regulated electricity market in the U.S., provides the most level playing field for Green Mountain Energy.

This strikes me as an excellent validation of the point I made two years previous.  One can predict in advance that most of the time regulatory agencies will favor establish interests and in various ways create barriers to entry for new competitors.  Regulation is, and always will be, largely a friend of established interests and opposed to the interests of innovators.

Moreover, most, and probably all (this becomes a long and complex issue), of the legitimate rationales for regulation can be addressed more effectively by other means:  for the environment, property rights solutions, for other issues, private certification and regulatory institutions (Underwriters Labs, Good Housekeeping Seal of Approval, AMI and AMS Montessori accreditation, etc.).

The June 1, 2004, post:

Regulatory Predictions

 

Public choice economists, those who study governments, would claim that it is possible to predict that regulatory agencies in government will be "captured" by the industries that they regulate.

Meanwhile, most people are outraged at the notion that regulators are cozy with the industries that they regulate. According to the public service notion of government, conscientious individuals who accept positions in regulatory agencies are there to serve the public good. It is a matter of personal integrity not to be corrupted by the corporations that they regulate. Thus the moral outrage when regulators are corrupted by the corporations that they regulate.

From the perspective of the Left, such outrage is evidence of human decency (much as, from the perspective of the Right, outrage over sexual misconduct, such as adultery, is evidence of human decency). From the perspective of public choice economics, Leftist outrage over regulatory capture is evidence of naïveté, not of human decency (there are likewise economists who would regard outrage over sexual misconduct as a matter of naïveté on the Right).

We evolved in small tribes in which feelings of moral outrage served a useful purpose. In a small tribal environment, those who did not conform to the moral dicta of the tribe were sanctioned communally, often by means of tribal feelings of moral outrage. In such a context, social feeling was itself the primary form of legislation and enforcement.

It is a serious problem of modernity when, where, and why to feel moral outrage. We do not want, and should not want, to extinguish our moral feelings. And yet the situations described above should encourage us to become somewhat thoughtful concerning when and where outrage is a useful feeling. It feelings of outrage no longer serve an effective enforcement purpose, but merely result in personal frustration, then perhaps we ought to learn to temper or redirect them.

In the case of regulatory capture, part of the reason that economists regard regulatory capture as a predictable behavior is due to the asymmetry of interest and knowledge. Industries that are regulated typically have intense incentives and extensive information regarding the issues on which they are being regulated. Ordinary citizens, and even the politicians elected to represent them, typically have very weak incentives and very little information concerning the relevant issues. Often regulation becomes highly technical: how can an ordinary person possibly keep up?

Moreover, the difference between sincere, well-intentioned public servants and corrupt regulatory officials is not as large as is generally imagined. Because regulatory issues are often technical, usually even conscientious regulatory officials represent the existing opinion regarding "best practices" in each industry. But upholding the existing opinion regarding "best practices" in each industry is almost identical to maintaining the self-interest of the more responsible portion of the status quo. Thus, simply due to ordinary circumstances, regulators almost always stifle innovation (This is certainly the case in education; again, endless specific instances are available on request).

Thus I am outraged by the fact of regulation, not by corruption in regulation. From my perspective, conscientious regulation is often almost as bad as corrupt regulation. In practice, relatively few regulators are openly corrupt. It is much more common for regulators to have similar attitudes, interests, and professional standards as the regulatees. The best regulators do come from industry and then receive jobs in industry when they leave their positions. In many particular cases, the moral status is very blurry. Most people believe themselves to be good people. When they are surrounded by like-minded people who reinforce their views, it becomes even easier to believe this. Soon "the public interest" and the views one happens to hold naturally coincide.

I know several of the good people in the State Department of Education who have harmed excellent charter schools, my own included. They are good people, doing what they believe to be right to the best of their ability. And, like many other regulators, they are destroying innovation and good education.

They can't help it. That is what they are paid to do: uphold current best practices.