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

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

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

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

Synopsis

The authors explore the patchwork of regulations, re-regulations and deregulatory proposals that have beset the US electricity production and distribution industries since the notion of splitting up what was considered to be a natural monopoly was first mooted.

Excerpt

Peter Z. Grossman and Daniel H. Cole

For a hundred years, economists, other scholars, and government officials understood, or thought they did, the electric power industry. Electric power, based on a single, large service provider, connected by wires to all of its customers, was thought to be an industry that could only operate efficiently as a monopoly; indeed it was something called a “natural monopoly.” Since it had to be a monopoly, with all the attendant inefficiencies and potential market abuses monopoly entails, there was no question about the propriety of government regulation (Lowry, 1973).

These basic assumptions, which at times seemed to conflict with observed facts during the first decades of the industry's existence at the turn of the twentieth century, remained largely unquestioned for the better part of 75 years. Then, changing institutional and technological circumstances led economists (e.g Demsetz, 1968, Primeaux, 1986) to question the basis in fact of the theory of natural monopoly, and the regulatory system it entailed. As other industries, previously deemed natural monopolies, such as telecommunications, adjusted to the new reality of post-natural monopoly theory, the electric power industry and government regulators remained reluctant to concede that anything fundamental had changed. Movement toward a deregulated electric power system did not occur until the last decade of the twentieth century, and then it was undertaken haltingly and piecemeal.

While the U.S. electric power industry and government regulators dithered, their counterparts in other countries, notably the U.K., were, by the late 1980s, embracing more completely a competitive market-oriented model of electric power generation and, to a lesser extent, distribution (Ruff, 1989; Lester, 1991). In the U.S., the public-policy debate over marketization and other deregulatory

The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 1-9.
Copyright © 2003 by Elsevier Science Ltd.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0995-4 . . .

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