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

EDITORS' FOREWORD TO CHAPTER 6

Chapters 2 through 5 cast doubt on the claims that the electric power industry is or ever was a natural monopoly. Indeed, in those chapters, concept itself is challenged. It is doubtful, too, that the electric industry, for technical or efficiency reason, ever had to be a collection of vertically and horizontally integrated monopoly firms. This cannot be very credibly argued from a theoretical standpoint, and it has never been demonstrated empirically. In fact, as an empirical matter, it is very difficult to call any industry intrinsically a monopoly.

But Chapter 2 did not rule out the possibility that some industry could be most efficiently organized as a single firm for a period of time. Moreover. Chapter 5 has noted that the very fact of an established form of industry organization may create its own rationale to continue that form of organization (path dependence). That in turn may make it more costly to change an industry. Given path dependence the transition costs of change may outweigh any benefits that accrue from change.

Thus at some times in history, in some places, it could it have been the case that the electric power industry, or more likely, one or more products of the industry such as transmission and distribution would have been most efficiently organized in a single firm. And this raises another question: might it still be true that some part of the electric power production and distribution would best be organized in single firm monopolies?

Many economists and electric industry analysts would say yes to this question. They would claim that transmission, and possibly also distribution, is, was, and will be for the foreseeable future a “natural” monopoly and should remain a government owned or regulated entity. The following chapter by Joseph Tomain, which largely recounts the legal and structural changes that affected the electric industry from the 1960s forward to the 1990s, also adopts the view that transmission should remain a monopoly.

The main argument in favor of a single monopoly transmission firm concerns the set up costs of a transmission system. There are large, and largely sunk, costs in putting down an electricity grid, and the economic incentive for multiple

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