[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.


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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