Joseph P. Tomain
The electric industry in the U.S. presents an excellent case study of government regulation. Like other network industries such as natural gas, telephone, and railroad, electricity regulation was based on the central political-economic idea that certain industries had natural monopoly characteristics and that the goods they provided were in the public interest (Tomain, 2000). Further, like all government regulation, the regulation of the electricity industry has embedded within it a deep tension between a preference for government and a preference for markets as the favored tool for social ordering. This tension is present today as the industry experiences a significant restructuring.
As a fundamental matter of political economy, markets and the property exchanged and valued in them exist only because of government protection. In short, markets do not exist without government. Still, the degree of protection
* Author's note: Chapter 6 was written before we understood much about the California electricity crisis of 2000. The chapter was also written before the events of 9/11 and before the Enron debacle. In another article, the author takes the position that California, Enron, and 9/11 have no impact on the wisdom of electricity deregulation as an energy policy. The revelations of market manipulation in the spring of 2002 by Dynergy, Reliant, Enron, and other actors, however, raise serious questions about the difficulty of designing a deregulatory policy for the electricity industry. At the same time, the widespread charges of market manipulation indicate the persistence of natural monopoly problems in transmission.
The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 111-139.
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