Robert Michaels has specialized in electricity and natural gas over the decades, in addition to antitrust law. Professor of Economics at California State University, Fullerton, Dr. Michaels is an adjunct scholar at the Cato Institute and has contributed many posts to MasterResource.
Q. Robert, you have spent decades in the regulatory fields of antitrust and of energy. How did it all begin?
A. Like so many of life’s better stories, it started with randomness. Around 1980 I moved from Washington, DC to the reality of a southern California mortgage. At the time I was working on the industrial organization of the mainframe computer market for some academic publications to help me get tenure at California State University, Fullerton.
I got a call from a former classmate about my possible interest in expert work in what would turn out to be a major antitrust case regarding an electric utility. I warned him that I knew nothing about the electric industry and hardly knew it was regulated by –my favorite acronym – FERC, the Federal Energy Regulatory Commission.
Q. That’s was a nice invitation. Get paid to learn about a new industry full of interesting political economy issues. How long was this consulting arrangement?
A. The original estimate was for two months of work, during which I was to do some math on concentration ratios. I was assured by the lawyers that I did not need to know much about reality, making the assignment ideal for me.
The job went on for 13 years during which I learned more than any reasonable person would need to know about one of America’s most bizarre industries. The client was a major corporate utility in California. The experience blew holes in almost all of the regulatory economics I knew—or had been taught.
Q. Where did you go to school undergrad and where did you receive your Ph.D. in economics?
A. I have an A.B. from the University of Chicago and a PhD from the University of California, Los Angeles (UCLA).
Q. Did you take a course in political economy? Real world economics?
A. Political economy wasn’t in the curriculum, but James Buchanan was in residence at UCLA, and I audited his class. Combine that with the material that George Stigler and Sam Peltzman were teaching at U. Chicago, and I learned a great deal about the real world.
Q. So what did you know about regulation and business decision-making?
A. In school they taught me that regulated industries were top-heavy with lazy people who gave boring and not insightful testimonies that were largely out-of-touch with any economics invented after 1900. This proved to be all wrong.
Q. Being in California, there had to be interesting regulatory episodes all around you to attract clients to you.
A. Yes. In this case, the defendant utility was hauled in for antitrust violations because it refused to allow interconnected municipal systems equal access to its transmission facilities. As things turned out, the municipals were engaged in pure rent-seeking to take advantage of some provisions in federal law to obtain transfers of wealth rather than competitive outcomes. The cases mattered because they were the start of active regulatory and legal consideration of the value of and possibilities for competition in what was thought to be a “natural monopoly.”
The more distant consequence was not visible at the time, but it would ultimately transform bulk [“wholesale”] power markets from monopoly to competition.
Q. What came next? And I assume you were teaching economics and business economics at Cal State Fullerton.
A. Later in the 1980s came the restructuring of California’s markets, a process initiated by the Public Utilities Commission to promote more competitive power markets. The main point of the docket was really to undo the effects of regulation that had raised California rates and prohibited customer choice thanks to misguided planning. The utilities tried to protect themselves from the competition on grounds that they had a fictitious “compact” with the state that would allow them to charge whatever rates the PUC verified were within the public interest, whatever that was.
At the same time, I would work on odd projects that extended the scope of my work beyond energy. For example, I worked as an expert at the California State Board of Equalization for an alcoholic beverage producer rebutting testimony by a prohibitionist think tank (really) that lowering certain alcohol taxes would dramatically increase underage drinking. We lost that one, but it was nice to put an entry on my bio stating that I had worked for some people so unmitigatedly evil. (I wish they had invited me to their Christmas party.)
Q. Let’s turn to your teaching career. Where have you taught, and where are you now at?
A. With occasional stints at the University of Southern California and the Claremont Graduate University, I have taught quite steadily [near 40 years] at California State University, Fullerton, the nearest institution of higher learning to Disneyland, where lots of my students work. I teach various managerial and microeconomics courses to MBA students and advanced undergraduates.
Q. And where did you meet Robert L. Bradley Jr.?
A. Rob turned up in my life after I co-authored some FERC testimony on behalf of the Natural Gas Supply Association supporting a full competitive market for interstate pipeline capacity and transactions to exchange and securitize it.
He was working for Enron at the time, which supported competitive transport markets as part of its strategy to become, in CEO Ken Lay’s words, the first natural gas “major.” Rob had gotten hold of a manuscript [“The New Age of Natural Gas”] that I had submitted for review by the Cato Institute for inclusion in its journal Regulation. We became fast friends despite my inability to comprehend his Texas drawl and his difficulties with Chicago-ese. (I grew up in Chicago.)
Q. What first got you interested in economics?
A. Oddly, for the longest time I thought that the subject was just a cool topic in applied math. I was fairly good at it, and only later did I learn (thanks to the above experiences) that it had everything to do with reality. Along came energy, and there I went.
Q. Which came first, your interest in energy or antitrust?
A. When I got out of UCLA, I couldn’t imagine having anything to do with either due to the distance from my scholarly interests. I was working in Washington, DC for the Institute for Defense Analyses, a Pentagon-related think tank that somehow gave me a security clearance.
After I moved to California, I got the almost-random phone call that got me into antitrust and energy economics, and the rest would be history.
Q. Tell us about your textbook writing interests?
A. Whatever the subject, only if you have taught the same course for some time can you appreciate how far from your vision the major textbooks are. So, I started communicating with scholars and editors on the manuscript that was eventually bought by Cengage Learning and became Transactions and Strategies.
A major publisher thought it was worth the risk of a market test, and whatever happens I thank them for taking the chance. If you haven’t yet done so, be sure to buy it despite the outrageous price.
Q. If you were to point toward something that would be part of your legacy, what would it be?
A. Almost anyone who works with economics knows that the idea of massive paradigm shifts is a fool’s errand for all but a handful of people whom we can’t identify in advance.
I’ve been a sort of worker bee, like most of my colleagues. But I worked with some ideas that made sense and worked on them with some people who also helped move things forward. I was there when electricity and gas moved from monopoly to competition, and that’s made the trip worth it.
Q. The magical 1980s and 1990s. And you saw the fall of iconic Ken Lay and mighty Enron….
A. Fall he did, for numerous economic and political reasons. But without him, would have the industry generated more consumer benefits, devised so many new tools to handle risk, and designed innovative ways to transact gas that changed its markets forever?
Enron was a hothouse for growing ideas. In my experience, once you get beyond a handful of lemons, almost no one who was present at the collapse had trouble finding new work in the industry, and Ken Lay certainly deserves some of the credit.
Q. Turning to the topic de jure, were the Texas blackouts a surprise?
A. From my California vantage point, they were. I just never got around to thinking about what might happen if we mixed renewable power’s uncertainties with the uncertainties of gas availability due to freezeoffs and capacity constraints.
My subjective reaction to this perfect storm was that it couldn’t happen in light of grid redundancies and operational options. So much for this economist’s expertise.
The big problem now is that every imaginable interest group has a plan for “reforming” the system, most of which entail decreases in consumer choice and technology stagnation. The research papers are all out there, just waiting for IER people to write them.
Q. Harold Demsetz wrote an article back in 1968, “Why Regulate Utilities?” Is true deregulation, state and federal, viable for electricity?
A. Demsetz’s article is one of the greatest “think pieces” ever written, but at least one competent economist critic, the late Oliver Williamson, did a good job in pointing up the realistic difficulties that might stand in the way of realizing its logic. The question is about the real limits of political and economic feasibility.
Q. How have your views on political economy evolved over the years and decades?
A. The economics that I learned decades ago continues to be my intellectual anchor. Maybe it’s just luck, but I consider myself fortunate to have avoided some detours that would have been obstacles to thinking clearly about the economics of these industries.
That said, I wish that I could have spent a couple of years seriously misguided and confused. It might have made for a more interesting, but probably not worth telling, story.
Thank you Professor Michaels.