Hirs: The High Cost of Overreaching Regulation, Secrecy

Ed Hirs lectures on energy economics at the University of Houston, where he is an Energy Fellow in the College of Liberal Arts and Social Sciences.

Breaking regulatory capture and deregulating markets became a national priority during the Ford administration. Progress continued during succeeding administrations, both Republican and Democrat, but since the turn of the century, the regulation at the federal and state levels has become more costly for businesses and consumers alike as information is withheld. This is especially true of energy markets.

The purpose of regulations is to provide safeguards for public and private constituencies in the public interest. These regulations are used to level the playing field by limiting the exercise of asymmetric control by one party over another, such as employer over employee, or union over manufacturer, or polluter over society.

The primary characteristics of competitive markets are that neither buyers nor sellers can exercise market power, and that there is a free flow of information across the market, or transparency. Since the days of Rockefeller, energy market regulators have limited the exercise of market power under most circumstances by requiring transparency and candor from market participants.

But over the past several decades, energy regulators themselves have been responsible for limiting market information. This has created or worsened an already uneven playing field for shareholders, suppliers, partners, consumers and even the regulators themselves. 

Regulators routinely withhold or approve the withholding of information regarding nuclear power, electricity markets, home solar, pipelines and the oil patch. What are the arguments for limiting the dissemination of information and who benefits?

The Department of Energy frequently withholds from public view information submitted to the DOE regarding one aspect or another of nuclear power. For example, in a letter to a prospective manufacturer of small modular reactors, the DOE stated: “We have reviewed the material in accordance with the requirements of 10 CFR 2.390 and, on the basis of the statements in the affidavit, have determined that the submitted information sought to be withheld contains proprietary commercial information and should be withheld from public disclosure.”

Why? It is a national priority that nuclear power be advanced. Without question, everything in the realm of nuclear power in the U.S. derives from research funded by U.S. taxpayers. So, not only does the submitted information belong to the taxpayer, but there is also an argument that it already belongs to competitors.

Electricity markets are advertised as transparent but often suffer from opacity. The ERCOT market in Texas releases daily data after 60 days. This provides a tremendous advantage to market incumbents at the expense of consumers. ERCOT has justified holding back the data to protect competitive information about market participants.    

The Railroad Commission of Texas (RRC) aggregates and averages price and quantity data over a month to avoid releasing any data that could reveal “proprietary” positions held by gas and crude traders. As a result, the public can only guess what is going on.

The CirclesX lawsuit regarding Texas gas market manipulation during the winter freeze of February 2021 could not have happened with RRC data because it does not exist. The CEO of CirclesX installed sensors on pipelines across Texas to compile the data. As a former senior director of Enron’s trading operation, he knows the playbook of market manipulation but is now working to do the job that the RRC should have done in the first place.

State and federal regulators for the oil patch often approve withholding well production data.  But why? In the case of EOG Resources’ famous Jake well in the Niobrara Basin, the company was interested in acquiring more acreage before Jake’s enormous success was known. It cost the State of Colorado itself in lower proceeds for state lands and lower tax collections as neighboring landowners traded leases at low values—at least for a time.

Enforcing asymmetrical relationships by restricting information prevents markets from working efficiently and is counter to public interest. As a matter of public policy, the nation should ban the practice of regulators withholding market information much as the Federal Trade Commission has banned noncompete agreements between employers and employees. Then, with transparency, market participants will be on a level playing field and the Ford administration’s initiative of reducing regulatory capture and regulations can be renewed.