[opendtv] Electric power as a natural monopoly
- From: Craig Birkmaier <craig@xxxxxxxxxxxxx>
- To: OpenDTV Mail List <opendtv@xxxxxxxxxxxxx>
- Date: Thu, 6 Feb 2014 14:55:13 -0500
Mark raised some questions about my assertion that the electric power industry
asked to be regulated as a natural monopoly around the turn of the 20th
Century. I went back to check my facts and found the following information that
collaborates my story.
I also found a great deal of unrelated information about the concept of natural
monopolies, which seems to suggest that this is fairly normal in capital
intensive industries...
Your mileage may vary.
Regards
Craig
http://www.galvinpower.org/resources/electric-revolution/chapter-three-edison-paradox-page-3
An Electric Revolution, Chapter Three: The Edison Paradox
Seeds of Monopoly
The fledgling electricity business entered its second stage of development — a
period that has echoes today — around the turn of the century. At its center
was yet another Edison disciple, Samuel Insull, who eventually headed Chicago
Edison. Insull understood that if his firm was to prosper, it must reduce the
number of small and aggressive firms offering competing supplies of
electricity. He began to stimulate demand, offering discounts to farmers and
other new consumers while buying almost two dozen utilities. Leading a company
now called Commonwealth Edison, Insull argued that electricity was a natural
monopoly, so vital to homes and factories that it should come at a cheap price
for everyone and from a guaranteed source.
As capital-intensive as railroads, the evolving electricity business developed
high barriers to entry by new competitors. Insull argued that duplicate power
plants and wires would be “economically wrong,” and that states should regulate
the industry. Having worked the back rooms of Chicago politics, he also knew
that campaign contributions would encourage regulators to supervise utilities
with a light hand. Emerging state regulations killed off power systems owned by
towns and cities. The monopoly lowered prices further, which increased
electricity consumption and helped America modernize at a rapid rate even
during the 1930s. It also curried political favor.
States passed laws that allowed regulators to set rates that earned utilities
fair returns on their investments. The way to earn even more guaranteed money
was to make ever-larger investments in generation plants and transmission lines
in order to sell more electricity. Insull eventually fell from grace in a
political corruption scandal, but electric power became a necessity that fed
the country’s appetite for refrigerators, washers, hair dryers and radios. From
the 1940s until the early 1960s, power consumption grew twice as fast as the
rest of the economy. Economies of scale meant that every new centralized power
plant was cheaper and bigger than its predecessors. And as long as the economic
benefits continued to accrue to everyone, the monopoly system remained intact.
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