Regulation and Energy Transport; J. Semmens

If such assertions be true, one must wonder how study after study can continue to uncover a recurring pattern of regulation-bred stagna tion, corruption, inefficiency, and protectionism. A revealing defense of regulation was made in 1974 by the General Counsel of the In"' terstate Commerce Commission.

REGULATION AND ENERGY TRANSPORT 91 Four arguments were raised on be half of regulation. First, that the regulatory agencies usually yield, sooner or later, to the inevitable changes in the business environ ment. Second, that the delays oc casioned by the ICC, for example, were not that bad. Third, that the waste engendered by regulation is not as bad as it could be. And finally, that regulation will not be as wasteful in the future as it has been in the past; the ((new" waste mandated by government controls will not be as gross as the ((old" waste. Despite its indefensibility, regula tion persists. The impact that the regulatory system has upon station ary transportation conveyances, primarily for shipment of energy products, will be the focus of the remainder of this report. Imperfect Competition and Incompetent Regulation In approaching the issue of com petition, or rather, its imperfections, as a rationale for government in volvement, many proponents begin by constructing an abstract perfect competition. This perfect version in cludes such notions as an infinite number of buyers and sellers in the market, as well as instantaneous information on supply and demand conditions. Under such a system, it is agreed that no regulation would be necessary. However, no such system exists. What does exist is imper fect competition. The role of regula tion then becomes clear. By careful adjustments to this imperfect envi ronment, it is claimed, the regula tory commission can remove the de trimental consequences and more nearly satisfy all needs.

To be sure, the interveners have the best of the phraseology. After all, the government is seeking to correct the imperfections of the mar ket, to insert deliberated planning and controls in place of the implied chaos of unplanned and uncontrolled markets, to insure fair competition. While phraseology may be useful as propaganda, it is impotent to deal with the economic realities. The unplanned and uncontrolled market is something of a misnomer. Actually, the market is a reflection of the continuous give and take of numerous participants, each of which is making its own plans and exercising its own controls. This very multiplicity of plans provides the flexibility that regulation lacks. And this is why unregulated mar kets consistently exhibit superior performance in meeting the needs and wants of consumers. Contrary to official dogma, it is the planned and controlled seg ments of the economy that are most chaotic. The only competition that has been ~~improved" by regulation is that between the growing number of government agencies and bureaus 92 THE FREEMAN February fighting over jurisdictional author ity. The major result of this achievement has been to divert ef fort from productive activities to legalistic wrangling between the regulated businesses and the vari ous regulatory bodies. The net re sult, of course, is a reduction in the aggregate wealth of the community.

This is no mean accomplishment, but it is questionable whether a reduction in wealth is socially de sirable. It certainly is not the objec tive sought by the intervention. Like some automaton gone ber serk, the regulatory commissions have frequently transformed their initial programming from preserva tion of competition to preservation of selected competitors. There are two predominant techniques. One is paternalism. The other is bureau cratization. Paternalism is evi denced when, in order to prevent ((predatory" or ((cut-throat" competition, the regulatory agency bars new entrants into the field and restricts or discourages innovations. The case-by-case methods followed pro duce no clear guidelines for the reg ulated industry. At the same time, vested interests of existing firms in market shares are treated as a prop erty right. A would-be competitor's proof that it could provide more effi cient service is not considered a rea son for allowing such a firm to enter the controlled market.

Bureaucratization is a more invidious force in the destruction of competition. Even those on guard against paternalistic inclinations fall prey to this vice. The key man ifestation of this phenomenon is the government's voracious appetite for paper. Not only do bureaucracies produce mountains of paper, but they consume them as w~ll. The regulated firm is constantly be sieged to produce more reports, pro vide more statistics, complete more forms. Smaller firms are hardest hit by this imposed cost of doing business. Not too surprisingly, the larger firms may be the only ones able to meet these costs. The reduced competition brought about by the· very actions of the regulatory authorities then becomes their reason for increasing regula tory powers. Nor can the heretofore protected competitors feel at ease. The regulatory agency may, at any time, turn on them with accusations of attempted restraint of competi tion or monopolistic practices, though, in truth, they may only have been following the dictates of the regulatory authorities.

It is apparent that regulation, to date, has been incompetent to achieve improved competition. In capable of assuring good perfor mance in the monitored industries, regulation thrashes about in aim less fashion lopping off consumer options, raising the costs of doing business, insuring misallocation of 1978 REGULATION AND ENERGY TRANSPORT 93 scarce resources, rewarding inefficiency-all to the detriment of the general welfare. The Price Is Not Right The prospects for transmission corridors over the next twenty years are anything but clear. With only limited proven reserves foreseen, the anticipated Hneed" for transport facilities is largely a shot-in-the dark. It is not irrational to ask why we need new pipelines if we only have ten more years' worth ofnatu ral gas to pump through them. Un disclosed in these estimates of re serves are the assumptions regard ing price. If current pricing policies are continued, the prognosis is in deed bleak. On the other hand, studies have indicated that with higher prices, the supply of gas would be stretched out for centuries.

There is nothing magical about this. Neither is it evidence of a vast conspiracy to withhold supplies. It is merely .the working out of the sim ple economic law of supply and de mand. Supply varies directly with price, while demand varies in versely with price. Therefore, if the price is .held below the uncontrolled market level, the quantity de manded will be stimulated and the quantity supplied retarded. Such is the current policy, which inevitably has led to depletion of.reserves and the forecast shortages. Analyses which purport to demonstrate that the supply of natural gas or oil is not sensitive to changes in prices are absurd. Yet, such analyses have spawned a so-called compromise solution based upon ttrolled-in" pricing and the vintaging of oil and gas. Periodically, the vari ous governmental agencies involved in this price control will classify various sources of supply as cCold" or cc new" based upon the initial year of production or discovery. The conse quence, over time, is a plethora of classifications, including ttold new,"