The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry

Peter Z. Grossman

…public utilities such as water and electric power companies are examples of natural monopolies.

-from Exploring Economics, an introductory textbook by Robert L. Sexton (1999, p. 267). The definition is illustrated with a large picture of an electric light bulb.

The title of this book refers to the economic concept of a “natural” monopoly, and as the quote above suggests, electric power has usually been considered an exemplar of this type of firm and industry structure. The importance of this concept to the development of electric power industry and government regulation in the U.S. cannot be overstated. Because electric power companies have been considered natural monopolies, it has been believed that such companies cannot be competitive, that they must be monopolies, and that they must be regulated by government agencies. Indeed, it is fair to say that the economic theory of natural monopoly has provided the foundation for: the establishment of monopoly power systems in the U.S.; the legal structure that exists with respect to electric power; and the regulatory system established by local, state and federal government bodies to control electric power production, distribution and consumption.

The early development of the electric power system in the U.S. will be examined in the next chapter. This chapter will consider the concept of natural monopoly itself, and what happens in a market if a firm actually displays

The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 11-39.
Copyright © 2003 by Elsevier Science Ltd.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0995-4

-11-