Consider water. How much to deliver to consumers and at what price to sell it are decisions made by regulators, not businessmen. Water prices have been kept artificially low — about half the price of delivery on a national basis — with over-consumption the inevitable result. Moreover, water prices do not rise in times of drought or plummet in times of plenty. Consumers are insulated from price signals regarding scarcity and thus must be begged to consume rationally.
Worse, truly phenomenal volumes of water are being wasted as a consequence of insane agricultural policies. In parts of the West, for example, highly subsidized water, sold to farmers at around 10 cents per 1,000 gallons, is devoted to irrigating price-supported surplus crops in the desert, irrigation that is so excessive that federally funded cleanup measures are frequently required. Pools, dishwashers, toilets, showers — all pale in comparison with the waterlogging of suboptimal cropland in 19 western states, a task for which 80 to 90 percent of America’s total water use is dedicated.
And drought or no drought, the law prohibits city dwellers from purchasing surplus water from farmers. Mutually beneficial transactions are verboten. It’s no wonder that when a dry spell occurs the entire system collapses.
The story’s the same for electricity. Tightly regulated for years, power companies have been prohibited from charging peak prices during periods of heavy demand. But peak pricing is even more important in the electricity arena than in the water business. Because many of the facilities that generate energy during periods of peak demand are used only 10 to 14 days a year, owners need to recover a year’s worth of depreciation and capital costs in one fell swoop. Hence, extra power during peak demand is incredibly expensive. Last summer, for example, power production costs reached $7.50 per kilowatt-hour in some parts of the Midwest. Likewise, the heat wave just last month drove the marginal cost of power in the Pennsylvania-New Jersey-Maryland interconnection to 94 cents per kilowatt-hour. Yet consumers were shielded from the market and continued to pay 5 to 7 cents per kilowatt-hour.
The price of such regulatory “kindness”? Brownouts and power disruption. Whenever governments attempt to insulate consumers from market prices, resources are used inefficiently and waste runs amok. Industry economists estimate that around $250 billion annually is lost to the economy because of the disconnect between electricity demand and prices. Remember that power lines must maintain a certain amount of voltage no matter what the demand, and presently, the voltage on the lines at night goes virtually unused. Manufacturers have little economic incentive to concentrate their operations in the evening, even though the economic savings would be tremendous. Residential consumers could likewise switch to running the dishwasher at bedtime or, with the increasing computerization of home appliances, purchase devices that run the water heater at night so that the following day’s power use could be kept to a minimum. In fact, the bulk of the economics gains that supposedly will accrue from the much-ballyhooed restructuring of the electricity industry stem not from the benefits of “competition” but from the theory that a restructured industry will eventually price electricity accurately at the margin.
Consumers have had no trouble adapting to marginal pricing of long-distance telephone service. Few of us find it odd that long-distance calls are cheaper after 9:00 p.m. Why should electricity or water be any different? Some people might argue that the poor need to be protected from real-time pricing, but even if so, the present regulatory structure makes little sense. After all, we help the poor pay for foodstuffs not by imposing price controls but by handing out food stamps. If intervention must occur, why not institute inframarginal pricing — control the price of power or water for a set amount of consumption but decontrolling prices beyond that?
It would be difficult to design a more absurd set of water or electricity policies, and it’s doubtful one could do so even if one tried. But this is what happens when politicians — not businessmen — run an industry. Although we can’t do anything about the weather, we can do something about water and power scarcity: Deregulation. Now.