Anti-price gouging laws get rulemaking process in New York

James Hanley and I have an op-ed on New York’s price gouging law appearing this week in Crain’s New York Business.

The New York attorney general’s office has initiated a rulemaking process intended to better ground the state’s price gouging law enforcement practices. The New York rulemaking may be the first time a state took seriously the idea that price gouging law enforcement requires careful thought. Here we take the occasion of the rulemaking process to suggest ways the state can improve its enforcement practice and reduce the compliance burden.

Sure, our favorite improvement would be simple repeal. However, as that is not on the table in New York, so we offer a few more modest suggestions.

(Plenty of economists have op-eds on price gouging that lay out the basic “supply and demand” arguments against them. I wholly endorse the standard economist’s op-ed against price gouging laws: basic economic literacy is important and and the lessons bear repetition. But many economists have written such pieces, including me. And I’ve had a longer piece on price gouging laws published in Regulation magazine. In the Crain’s op-ed we try another approach.)

Vertical disintegration for electric utilities: A half-serious proposal

At Utility Dive Ari Peskoe tries answering the question, “Can FERC convince utilities to build modern transmission systems?” Peskoe directs Harvard Law School’s Electricity Law Initiative. The summary up front succinctly states the problem.

For FERC’s rules to be successful, they must overcome utility incentives to overlook cost-saving technologies, prioritize local projects over regional investments, and thwart development of projects that might threaten their generation interests.

Notice that the incentive problem is inherent to the nature of vertically-integrated electric utilities. If a company owns transmission assets and generation assets in the same region, then decisions about transmission assets affect payoffs expected by generation assets. Similarly, decisions about generation assets affect payoffs expected from transmission.

A company board and management cannot be made to be ignorant of the interactions. The board and management of vertically integrated utilities have inherent incentives to invest in transmission assets in ways that do not detract from the value of their generation assets. No code of conduct erases the incentives. Executives may be prohibited from stating the obvious, but they cannot be prohibited from thinking the obvious.

Peskoe said, “Rather than expanding transmission to increase interconnectedness, utilities have recently been mired in small-scale projects that often simply rebuild last century’s grid.”

Not too surprising, right?

The grid built up last century primarily served to connect a monopolist’s generation to the monopolist’s locked-in customer base. That grid and the companies generation fleet were developed together in ways that made sense to utility shareholders last century. That grid enhances the value of old generation assets to utility shareholders even while it may reduce the overall value of the grid to society.

One possible fix is an old idea that was mostly ignored in the US: the transco.

The federal government should prohibit ownership ties between transmission and generation. (Ownership ties between transmission/distribution and retailing are also suspect, but that is less of a federal issue.) Spin off all transmission in an RTO to a single transmission owner with no financial ties to generation or retailing companies. That transco would remain a FERC-regulated public utility. Competition among generation is heightened when the bias created by vertical integration is removed.

So, half seriously, I’m proposing a ban on vertical integration in the electric power industry.

Only half seriously because it would be a fairly heavy handed regulation. Vertical integration often provides economies that dis-integration would eliminate. But here it seems that vertical integration of transmission and generation assets is driving anti-competitive behavior that itself has high costs. Two decades ago FERC and most utilities involved in the formation dismissed the transco idea. Might have been a mistake, as two decades of FERC frustration around transmission investment suggests.

Virtical disintegration. It’s a half serious proposal that requires serious consideration.

I admit it, I was wrong (about a federal government price gouging investigation)

Recently a handful of politicians called upon the Federal Trade Commission to investigate oil companies for potential price gouging. I was reminded of an episode from a few years back in which politicians called upon the US Department of Transportation to investigate potential price gouging by airlines.

An Amtrak train derailed in Philadelphia in May 2015, interrupting passenger service in the area for several days. Air travel rates jumped along some affected travel routes. In response Senators and Members of the House called upon the DOT to investigate.

I blogged about the calls for investigation in a July 2015 post at Knowledge Problem. There I made the following prediction:

After a month or two the DOT will report finding that airline prices did jump suddenly after the derailment as demand for air travel jumped up. They will observe that initial price spikes resulted from airlines’ computerized pricing mechanisms and did not reflect an intent to “take advantage of stranded passengers in the wake of such a tragic event.” They will note that airlines responded by adding flights and pressing larger aircraft into service. The report will conclude temporary price spikes reflected the ordinary workings of supply and demand under short-lived extraordinary circumstances. No finding of unfair practices will result, and no trade practices will be condemned.

I did not recall whether the investigation led to any particular conclusion, so I Googled it. To my surprise, my prediction was wrong in a key part.

I wrote “after a month or two the DOT will report…” but it was actually 18 months before DOT concluded its investigation. There was no report. Rather, as the Associated Press described it, the “department quietly sent letters to the airlines” stating the investigation had concluded. The DOT said it found “no evidence of unfair manipulation of airfares or capacity, nor evidence of unconscionable increases in fares beyond normal pricing levels.”

I was wrong on the timing of DOT action, but right about what it would find.

One wildcard this time around. The new chair of the FTC is a strong critic of existing competition policy practice. Last September the FTC announced several efforts to boost scrutiny of gasoline markets. Perhaps under new management FTC lawyers and economists will come up with some new theory of price gouging to justify doing something.

More likely, sometime after the November 2022 elections, the FTC will conclude they found no widespread market manipulation or price gouging. It won’t make much news when they conclude the report.