The Networks as Infrastructure - the Reestablishment of Market Power

By Trebing, Harry M. | Journal of Economic Issues, June 1994 | Go to article overview

The Networks as Infrastructure - the Reestablishment of Market Power


Trebing, Harry M., Journal of Economic Issues


In the past few years, public utility networks have come to be recognized as an integral part of the nation's infrastructure [e.g., NTIA 1993!. This accords public utilities a new dimension of importance because of the interdependent relationship between infrastructure, productivity, and real income. Interestingly, this growing awareness of the importance of networks as been matched by a parallel desire to diminish the role of regulation in public utility industries. Controls over earnings, prices, and conditions of entry and exit have been severely circumscribed or, in an increasing number of cases, eliminated. This raises an intriguing issue: Can the establishment, utilization, and maintenance of an infrastructure that is of fundamental importance in a globalized economy be entrusted to the signals, motivations, and penalties associated with substantially deregulated electricity, natural gas, and telecommunication markets?

To examine this issue, the following questions will be considered: First, why has network infrastructure received increased attention; second, how adequate are policies of deregulation and promotion of competition in light of inherent network characteristics; and third, what other options exist for public policymakers?

Why Networks Receive Growing Attention

The traditional system for supplying electricity, natural gas, and telecommunications consisted essentially of vertically integrated, regulated firms performing most if not all of the functions associated with the provision of service. In electricity supply, the same firm typically built and operated generation capacity, transmission networks, and distribution facilities. In the natural gas industry, the price of gas at the wellhead was set through a system of area ceiling prices established by the Federal Power Commission, while pipelines acted as purchasing agents for the local distribution companies (LDCs). In telecommunications, AT&T controlled 100 percent of the long distance telephone market and 80 percent of the local market. Retail electric and gas and intrastate telephone rates were fixed by state commissions, and bulk power and gas sales for resale were under FPC/FERC jurisdiction and interstate telecommunications was under FCC authority.

Beginning in 1968, this traditional system of supply and regulation was subject to a strong series of external shocks. The energy crisis and general price inflation led to cost overruns, excess capacity, and rapidly escalating electricity prices, while the natural gas industry was plagued with major curtailments followed by a period of oversupply in which, paradoxically, gas prices rose at the retail level. In telecommunications, new technology created opportunities for new entrants, which led AT&T to introduce retaliatory pricing and interconnection restrictions.

In response to these crises, national policy changed from one of regulated monopoly to promotion of a pluralistic, decentralized approach toward energy and telecommunications that placed much more emphasis on the role of deregulated markets. This trend was evident in the National Energy Act (1978), AT&T divestiture (1982), the Modified Final Judgment (MFJ) (1984), amendments to the Clean Air Act of 1990, the Natural Gas Wellhead Decontrol Act (1989), FERC Order 636 (1992), and the Energy Policy Act of 1992.

As a result of these changes, an entirely new cast of players was introduced, each of whom had a vital interest in access to and pricing of public utility networks. The viability of exempt wholesale generators (EWGs) would require access to the transmission network. Natural gas producers, freed from wellhead price regulation, wanted to move downstream and negotiate sales directly with big buyers and LDCs. Conversely, large buyers wanted to take advantage of gas oversupply and move upstream to negotiate lower prices. Both factions demanded unbundled access to the network and negation of the pipelines' merchant function. …

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