One of the key theoretical elements of our current economic system is that the idea of “supply and demand” is exquisitely sensitive to the comparative values of goods and services – it is considered to be “the” correct way to find a fair value. However, it also seems to have some inherent problems that result in clearly incorrect valuations unless appropriate controls are put into place on the process. Last week’s energy crisis in Texas dramatically pointed out one of these problems. There were multiple instances of people getting power bills that were on the order of a hundred times “normal.” One example that was shown on the news was a man whose usual power bill is $200 a month getting a bill for $17,000. Apparently the reason for this is that since all of the power, and most of the natural gas supply, had been put out of commission by the cold weather – there was almost no supply. However, the demand remained unchanged. That means that the ratio of costs automatically tipped, resulting in these outlandish overvaluation of the power that was delivered, creating the startling bills.

There were many things wrong with what happened. One was that the customer have no way of knowing the actual cost of fuel at the time that they are using it. They signed up to a contract that said the amount that they pay is based upon the instantaneous price point of energy – under the assumption that paying a fixed price would require the power companies to add a “cushion” resulting in higher prices. The problem with this is while it might result in lower instantaneous prices, it can also work the other way and result in higher (shockingly higher) prices. The idea of only paying the “real” price makes sense if you know the real price, and you have the ability to adjust your demand when necessary. However, in situations such as what happened in Texas none of that applied. They didn’t know the price they were paying, and they needed to keep power on for heat, lights and cooking. They didn’t find out about the change in price until after they had used the product and incurred the cost. This is clearly not in alignment with any of the economic theories that posit a balancing of costs because knowledge and negotiations between the buyer and seller.

This all happened largely because Texas considers itself “free and independent”, without regulations as much as possible. Because of this they disconnected themselves from other national grids, removed or didn’t implement regulations concerning the maintenance and design of grid components, and allowed the price of energy to fluctuate without bounds. Therefore, when the terrible weather (which happens every few years), they hadn’t weatherized their energy system, couldn’t get emergency power from out of the state, and prices skyrocketed. It was all very predictable (and had been predicted), but nothing was done about those predictions.

I think this presents us with a very interesting, and sad, example of why an appropriate level of regulations are necessary. In order for a large, interconnected, highly unstable economy (such as exists in the USA) to function properly and equitably regulations are absolutely necessary. The discussion shouldn’t be polarized like it is these days with the too sides going into the far extremes. The discussion should be on figuring out what needs to be regulated and what doesn’t, and how to achieve an optimal level of regulation to provide necessary protections and at the same time not stifle creativity. We need regulations and standards, but we also need to be sensitive to only regulate what needs to be regulated. Clearly, when profits are involved we cannot depend upon companies regulating themselves – that has been shown far too often to be a seemingly impossible expectation.

As an aside, the idea of not interconnecting the State’s power grid with the other major power grids in nearby states reminds me of the bad old days when each region’s railroads used a different gauge (distance between tracks). That was all well and good, but sure made it difficult to share resources or do business across state lines. Apparently there were more than 20 different gauges in use at the same time. That became a real problem during the Civil war because everything had to be unloaded and reloaded (by hand) at each transition. However, it might have some utility in preventing an enemy neighbor from just rolling on it. Of course that is easily fixed. Australia still has this problem of multiple gauges in the same country. Some places have a third rail to accommodate two different gauges on one track, I have been told that there are devices that change the spacing of train wheels (although I never saw them in action), and otherwise there is a lot of unloading and loading to transfer shipments. I am sort of surprised that Texas didn’t go all out and institute a difference frequency and/or voltage standard for their State.