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Economics: Regulation and Deregulation of Energy Sectors

06/15/2006 11:45 AM
Paul L. Joskow, Elizabeth and James Killian Professor of Economics and Management; Director of the MIT Center for Energy and Environmental Policy Research

Description: After viewing Paul Joskow's meaty history of the nation's energy industries, the baffling line items on your monthly utility bill may make more sense. Joskow describes energy as perhaps the most regulated area in the U.S. economy. The natural gas, electricity and oil businesses have seen price caps and floors, as well as regulations around service quality and safety, environmental impacts, energy efficiency and entry of new suppliers. Different rationales spur these rules, from interest group politics to the need for more reliable energy production. Some of these regulations have led to unanticipated and negative outcomes. Joskow describes the -sorry history of price regulation" of crude oil in the 1970s and early '80s, which followed a public outcry against high oil prices. When the government tried to set prices on this volatile market, so many loopholes emerged that -the only effect was to distort domestic petroleum markets." Over a half century, Joskow notes the paradox that price controls generally corresponded to higher oil prices and lower domestic production. Joskow demonstrates with graphs and slides how all energy industry sectors have undergone complex regulatory phases, many with ambivalent outcomes. Partly in reaction to this regulation and to increasing demand for energy, energy industries are being restructured and deregulated. In the case of natural gas, Joskow views the changes as a success, in that the -market meets consumer needs in a more efficient way," with more domestic production and additional supplies coming into the U.S. market. Electricity, Joskow's -favorite topic," is the last sector to be restructured, with the end of utility monopolies in electricity generation, transmission, networks, and distribution. A model of comprehensive reform -has been contentious and slow to evolve," and with high natural gas prices, the evidence is far from in that deregulation will make electricity cheaper, at least in the Northeast. Some states, like California, -embraced competition, then unembraced it." Joskow lauds the success of energy efficiency standards in appliances, but bemoans the stagnation in fuel efficiency for vehicles in the U.S. He says a key challenge for economists is -to persuade policy makers that they ought to increase the price of gas if they're concerned about vehicle efficiency and alternatives to oil." He advocates as well replacing EPA regulations with a cap and trade system for various air pollutants, which in Europe seems to be working well.

About the Speaker(s): Paul Joskow has been on the MIT faculty since 1972 and served as Head of the MIT Department of Economics from 1994 to 1998. He is engaged in teaching and research in the areas of industrial organization, energy and environmental economics, competition policy, and government regulation of industry. Joskow has published six books and more than 120 articles and papers in these areas.

Joskow is a Director of National Grid PLC, a Director of TransCanada Corporation, and a Trustee of the Putnam Mutual Funds. He previously served as a Director of New England Electric System, State Farm Indemnity Company, and the Whitehead Institute of Biomedical Research. Joskow has served on the U.S. EPA's Acid Rain Advisory Committee and on the Environmental Economics Committee of the EPA's Science Advisory Board. Joskow is a Fellow of the Econometric Society and the American Academy of Arts and Sciences.

He received a B.A. from Cornell University in 1968 and a Ph.D. in Economics from Yale University in 1972.

Host(s): Office of the President, Energy Research Council

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MIT World — special events and lectures

MIT World — special events and lectures

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