Douwe Osinga's Blog: Why the blackout was no problem

Saturday, August 23, 2003

Why the blackout was no problem

After the recent blackout in North America, there is a lot of talk again about the pro's and contra's of privatisation and deregulation of the electricity industry. Mostly about the contra's, actually. A lot of the rants I read are like: it didn't work in California, it didn't work in Australia and it is not going to work in the Netherlands either. Without a miss a discussion ensues with people saying, but it did work in Pennsylvania and Texas and actually it worked out fine in Australia and it wasn't the deregulation that failed in California. The conclusion probably is that deregulation can work, but that it won't if you don't take care.

The point is, humans fail to see that a lot of small gains can outweigh one big disadvantage. The black out in North America is a point in case. People tend to think that an occurrence like that proves that failure of deregulation. The total costs seem to be around 1 billion dollar. It seems a lot, but the total bill of electricity generation in the US is somewhere around 400 billion dollar. If due to deregulation something like this would happen four times a year extra, it would drive up costs by about 1%. Deregulation typically aims to reduce costs by 20%.

Farm subsidies are another example. The Common Agriculture Policy, which spends (some would say wastes) about 50 billion euros a year on farm subsidies, costs every European a little (well, 150 euros or so). But it brings a lot of money to the farmers. So anytime somebody proposes to cut the subsidies, the farmers get mad and park their tractors on the highway. The general public thinks: it's not fair that they want take money from those farmers.