The Persistence of Natural Monopoly

Abstract

California electricity crisis has been cited as Exhibit A for the failure of electric industry restructuring. That perception is wrong. There are plenty of other culprits in the California drama bad weather, poor regulatory design, and unbelievably wrong economic predictions to name three. Nevertheless, the California crisis has exposed a central problem for industry restructuring: the transmission bottleneck. The restructuring of the electric industry was an idea that enjoyed widespread support from Republicans and Democrats, federal and state officials, as well as producers and consumers. The idea was driven by a single promise: the industry could become more efficient. That magic word efficient induced dreams of more production, cheaper consumption, and technological innovation. In order to achieve that efficiency, market competition had to be promoted. Competition, in turn, required the dismantling of the traditional form of command-and-control regulation that was premised on the theory of natural monopoly. Unfortunately for electricity deregulators, the theory of natural monopoly could not disappear simply because of a desire for a more competitive future. The simple point of this article is that the physical structure of the electricity industry, specifically its distribution segment, remains a monopoly and as long as it does consumers do not have open access to cheaper production. So far, regulatory responses to the transmission problem have not succeeded. like other public utilities, such as natural gas, water, telephone, and railroad, electricity regulation was based on the political economic idea that certain industries had natural monopoly characteristics and that the goods they provided were publicly desirable. Today, such public utilities are referred to as network industries and they share certain characteristics. All are capital intensive. And, all can be easily broken into three segments: generation or production; transmission usually large-scale, and frequently interstate; and local distribution to consumers.