In 1974, writing for the Brookings Institution Stephen Breyer and Paul MacAvoy advocated for increased coordination in the national electrical grid. They noted that most electricity regulation occurs at the state level through commissions. The article notes that technological increases in electrical generation have occurred and have resulted in a corresponding increase in the economy of scale. However, the authors see a potential problem in the transmission and distribution of electricity.
The authors went on to identify six categories that could produce significant cost savings: operating costs, peak demands, reserve costs, breakdown reserves, generating costs, and transmission reliability. I won’t detail these categories, but the authors explain them well and I have no doubt that improvements in those areas identified would result in increased efficiency. However, the closing sentence stood out to me: “[c]oordinated planning over a wide geographic area can reduce total construction and help to locate the area’s plants so as to produce the desired level of power at a lower cost to the environment.”
The preceding sentence begs the question of “who?” Who should engage in this coordinated planning? There is no doubt that economic efficiency increases with economies of scale, but the electricity market isn’t a traditional market. Unlike the manufacture of automobiles or computers, the generation, transmission, and distribution of electricity is a highly regulated industry. This, of course, is due to the concept of natural monopolies, which was covered earlier in the course. The injection of regulation inserts additional decision-making power into the relationship between producer and consumer.
The twentieth century economist Friedrich A. Hayek wrote an essay titled “The Use of Knowledge in Society.” In it, his line of reasoning is that central planning always fails because no one person or persons can possess the knowledge necessary to effectively manage the economy. He writes:
The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources—if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
It’s the existence of “dispersed bits of incomplete and frequently contradictory knowledge” that gives me pause whenever the argument is put forth in favor of greater centralized planning. Presumably, the authors are making the argument that federal regulators would oversee this coordinated planning. For instance, the authors write that the most efficient way to generate electricity is to install the largest generator that technology permits; however, the notes in our text state that recent economic studies suggest the optimal size of generators should never exceed 500 MW. Operating under the presumed wisdom of select regulators in the 1970s, massive amounts capital would have been committed to building generators much bigger than their optimal capacity; that is malinvestment.
The waters have been muddied due to the inherent nature and regulatory framework that govern the electricity industry, but I think we have a better chance at avoiding costly errors resulting from grandiose planning by involving as many actors in the market as possible. More economic efficiency will result from the decision-making of thousands of knowledgeable individuals versus the limited knowledge of a select group of regulators. I should note, my argument against forced coordination is not meant imply coordination in and of itself is a bad thing. It most likely is a good thing and will probably come about, but it needs to happen through the independent decision making of the firms involved, not through the edicts of regulators.
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