Electricity and Energy Policy in Britain, France and the United States since 1945

Published by EH.NET (June 2009)

Martin Chick, Electricity and Energy Policy in Britain, France and the United States since 1945. Cheltenham, UK: Edward Elgar, 2007. x + 205 pp. $100 (cloth), ISBN: 978-1-84542-111-3.

Reviewed for EH.NET by John Neufeld, Department of Economics, University of North Carolina ? Greensboro.

International comparisons of policy development are far too rare; successful academics tend to specialize, and the mastery of historical conditions and events in any one country is more than enough basis for a full research program. Familiarity with the work of academics in other countries is not unusual, but familiarity with the details of policy implementation is less common. Knowledge for the electric power industry about such details is particularly difficult. It is an industry universally shaped by government policy, but the institutional structures shaped by that policy differ greatly from country to country. Nevertheless, a cross-country comparison of postwar government policies and institutional structures is exactly what this book tackles. Martin Chick, Senior Lecturer in Economic and Social History at the University of Edinburgh, has tackled this difficult and ambitious undertaking and has tried to do it in only 200 pages. Despite a few flaws, it?s a valuable and laudable work.

The book?s strategy is to devote a chapter to a single aspect of energy policy (electricity pricing, for example) and weave within it a narrative of concurrent events in the three countries. In some cases policies in one country have had a clear effect on those of another; in other cases one country?s energy policy has developed as if it were on a different planet. Some policies in all three countries were reactions to common events, such as the 1973 Arab oil embargo. Other seemingly convergent policies, such as the introduction of wholesale competition to the electric power industry in the U.S. and Britain, appear to have had different causes. The book?s first chapter, the introduction, suggests that the book is entirely about electric power policy. Most of the book is devoted to that topic, but two early chapters deal with fossil fuel.

My primary work and expertise is in the history and development of the U.S. electric power industry. That may place me in the perfect target audience for this book. I was already familiar with the parts of the book dealing with the U.S., but far less familiar with the other two countries. I found it interesting and helpful to have an account of the parallel developments in the other two countries. As is usually the case with the acquisition of knowledge, I finished the book with more questions about the areas of my relative ignorance than I had when I started. I do, however, have the feeling the author is not as knowledgeable about the U.S. as he is about the other two countries and has not done as good a job explaining the evolution of U.S. policy as he has that of Britain and France. That is partly because of the asymmetry of my knowledge, but I think there is evidence in the book to support this feeling.

Chick draws heavily (but not exclusively) on primary sources for the sections on Britain, and, to a lesser extent, for those on France. These primary sources consist of records of discussions of policy makers and government reports. For the U.S., however, he has relied entirely on secondary sources: published books and journal articles by economists and historians. This difference in sources is responsible for U.S. policy being depicted differently, entirely from the outside, as opposed to an inside perspective on British and French policy. A work that relies on abundantly available primary sources by necessity must be more narrowly focused than one relying primarily on secondary sources. Unfortunately, combining the two has resulted in topics based on primary sources being accorded more space than other more important topics based only on secondary sources.

The narrow focus of the parts of the book based mostly on primary sources sometimes makes those parts seem tedious. The discussion about the British response to the Suez Crisis, which is several pages long, includes a page-long quotation from an internal government memo. Its point is to show how crazy the thinking of government officials responding to crisis could be, although the policies advocated in that memo were apparently not implemented. By contrast, an important aspect of the U.S. response to the 1973 oil embargo is not discussed. That policy response included a complex system designed to control petroleum prices by creating a distinction between ?old oil? and ?new oil.? There is, of course, no chemical difference between the two, so a system of tradable permits was created. It increased U.S. dependence on OPEC oil by subsidizing its importation, and it transferred large amounts of wealth from major oil companies to smaller independents. This crazy policy reaction to a crisis was actually implemented, not just discussed.

An entire chapter relying mostly on primary sources is devoted to the European Coal and Steel Community (ECSC), a peripheral issue for energy policy. There are aspects of the ECSC, of course, that impinge on energy policy, but the ECSC story is mostly about the efforts to create a new pan-European order after the old one had been eliminated by the Second World War. Furthermore, is not clear that events and decisions associated with the ECSC had much effect on the later development of energy policy. Again by contrast, the topic of U.S. petroleum policy deals almost solely with import restrictions. The policies of state commissions (such as the Texas Railroad Commission) to create and maintain market power for in-state producers is not mentioned. Policies subsidizing domestic production, such as the oil depletion allowance of the income tax, are not covered. The policy battles over drilling in environmentally sensitive areas are also not discussed. An important feature of British oil production is also omitted: the Continental Shelf Act that became effective in 1964. That Act resulted in petroleum exploration and discoveries in the North Sea within a year. This led to the major exploitation of North Sea deposits following the post-1973 petroleum price increases. An analysis of important aspects of British and French energy policy development based on primary sources is a worthwhile contribution. A broad comparative synthesis of energy policy in the three countries is also a worthwhile contribution. The total value of both of those endeavors would have been greater, however, had they been kept separate rather than combined in a single book.

The two chapters I find most valuable are the ones on energy pricing (chapter 4) and on restructuring of the electric power industry (chapter 6). France presents a puzzle concerning energy pricing. In contrast to the U.S. and Britain, rational economic analysis and the application of marginal-cost principles became, after the war, a characteristic of French energy policy in general and electric rate structures in particular. Chick describes the way that academic economists and their students became influential policy makers in that country concerned with economic efficiency. The French have a strong pedigree in the development and application of pricing theory, but Americans and British have also made major contributions. Chick maintains at the end of this chapter that the adoption of marginal-cost pricing principles in all three countries showed the new influence of microeconomics. He is wrong about the United States. President Carter?s 1977 National Energy Plan did contain a provision that would have resulted in the reform of electricity structures, but entrenched interests succeeded in its elimination in Congress. He has exaggerated the importance of the adoption of time-of-day pricing by the regulatory commissions of a number of states. The actions of those commissions generally have permitted the inclusion of some marginal-cost principles in rate structures but do not mandate them; their actual use has been slight.

The chapter on restructuring discusses the introduction of unregulated competition by generators in wholesale markets in Britain and the United States, the privatization of the industry in Britain, and the resistance to both privatization and market competition in France. The market structures adopted in the U.S. are variations on the one developed in Britain, and the description of the operation of that market provides a good brief introduction to that class of electricity markets. A good short description of the rise of deregulated electricity markets is provided; it seems to draw heavily from the more detailed account given by Richard Hirsh in Power Loss. A brief narrative of the melt-down of that system beginning in the summer of 2001 is also provided. The California experience exposed the susceptibility of competitive wholesale electricity markets to market power by generators. Although the 2002 American Economic Review article by Borenstein et al is cited, its primary conclusion that 59 percent of the price increase was due to market power is not. In its deregulation plan, Britain apportioned all fossil fuel plants to only two companies and (reluctantly) maintained government ownership of the nuclear plants. An obvious prediction is that this design would lead to serious market power problems. Did it?

John Neufeld (john_neufeld@uncg.edu) is a Professor of Economics at the University of North Carolina at Greensboro. His most recent publication is ?Corruption, Quasi-Rents, and the Regulation of Electric Utilities,? Journal of Economic History, vol. 68, no 4 (December 2008), pp. 1059-97.