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

By Peter Z. Grossman; Daniel H. Cole | Go to book overview

10.

DOES THE END OF A NATURAL MONOPOLY MEAN DEREGULATION?

Peter Z. Grossman


INTRODUCTION

How likely is genuine deregulation in the U.S. electric power industry? Events at the time of this book's completion are not encouraging. As Professor Morriss has argued in the previous chapter, much of what had been touted as deregulation is simply re-regulation. Moreover, problems and failures under these new forms of regulation have led to calls for a return of the old regulated monopoly system (Goozner, 2001). The motivation this time is not the alleged natural monopoly characteristics-falling average costs as output increases-of the technology, although some argue that at least with respect to distribution, the industry is indeed still a natural monopoly, needing substantial regulation (see Chapter 6).

More typically, proponents of the old-style regulatory process advance new arguments. One common argument stands the old natural monopoly idea on its head. As noted in Chapter 2, competition was thought unsustainable in electric power because one producer would be able to supply the market at a lower cost than any combination of smaller firms (strict subadditivity). The result was that a monopoly firm would inevitably prevail. This firm would then price at the level that maximized its own profits-a level that would create hardships for consumers, a drain on economic functioning generally because too little

The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 215-243.
Copyright © 2003 by Elsevier Science Ltd.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0995-4

-215-

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