[opendtv] Re: Electric power as a natural monopoly

  • From: Mark Schubin <tvmark@xxxxxxxxxxxxx>
  • To: opendtv@xxxxxxxxxxxxx
  • Date: Thu, 06 Feb 2014 15:13:38 -0500

Insull went about establishing his monopoly the "natural" way: he bought out his competitors. State utility regulation in Illinois didn't begin until 1914 -- four years after the Federal government got involved in wireless regulation -- and Chicago's franchises allowed for geographic competition; Commonwealth Edison's predecessor Chicago Edison was one of 30 electric power companies operating in the city.


On 2/6/2014 2:55 PM, Craig Birkmaier wrote:
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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