Power Deregulation Doesn't Work

What the events of the last decade show is that monopoly is monopoly. In particular, there is such a thing as Natural Monopoly. The nonsensical ideas of free-market Libertarians, Conservatives and Clinton Democrats about competition in all things have been refuted by the facts.

"Natural Monopoly" is a economic, legal and political concept applying to those circumstances in which competition is impossible or impractical. Suppliers of residential utilities - water, sewer, natural gas, electricity and landline communications - are good examples of Natural Monopoly. In each case, it is still simply too expensive to provide more than one service. In most cases, that fact was established as a matter of experience in the early development of each utility. For example, public regulation of the water supply and sewerage was adopted everywhere as cities grew, because the possible consequences of  mismanagement, such as contagious disease, disability and death, were too great.

What all these utilities have in common is physical presence: they provide their services via a physical connection to the residence, usually in the form of pipelines or cables. In order to provide a competing service, it would be necessary to install infrastructure all the way from a residence to a central facility. Thus, to be competitive, an alternate sewer service would have to build a second or third or fourth sewer system. I think everyone will see the absurdity of this proposal with very little thought: there just isn't enough land to accommodate it. The same logic applies to roads and all their appurtenances: sidewalks, street lights, signs, markings, etc.

Because the alternative requires too many resources, we grant monopoly to one provider of each of those services. There is one electric company, one water company, etc. These services are "utilities" because of  their public necessity. They are publicly regulated because everyone has an interest in their proper operation. For example, improper operation of water and sewer services could result in the spread of contagious diseases, as once was common in the days of open sewers.

Telephone service shows where competition is possible and where it is not. The key link in the service is the cable from a central point to a residence. The "last mile" is the most expensive step in providing the service. For example, the main optical cables between California and the Pacific Northwest and Canada pass within a few hundred feet of my house. If my phone were connected to that trunk line, my telephone cost would be reduced to pennies or less each month. But that cannot be, as it would disrupt the long distance service. So, the trunk line has to be tapped at a central distribution point many miles from here, where it is broken down for many competing telecommunications services. It is economical for competitors to have their own equipment at these central stations. However, when a competitor wants to ship its service by landline to a residence, it has to connect to a single telephone line from the central station to the residence.

In fact, the major telecommunications trunk lines are operated by a few major corporations. It takes huge amounts of capital to lay down thousands of miles of cable. Nonetheless, this is an area in which several competitors are possible because one cable is limited to carrying millions of connections, but billions of connections are made simultaneously. So, any given conversation could select different routes at different times by which to make and keep the connection. Thus, trunk lines are capable of competition. The same principle operates at break down points, central stations. Thus, it is possible to "mix and match" various long distance and central station services on a competitive economic basis. This possibility has to do with the physical ability of each cable to carry just so many connections at any one time.

But cable limitations do not prevail beyond the central station. Even the lowly copper wire is capable of far more bandwidth than most residential customers ever use. Lately, DSL and digital video (TV) by landline are innovations that use available copper wire more effectively. Thus, the connection to the service users involves cabling that is not cost effective. Since one piece of equipment at a central station can service millions of users, but each user needs a separate connection to that equipment, the cost of providing service multiplies geometrically as it moves from the central station to the end user. Thus, local competition is very expensive.

In the last decade, telecommunication companies have broken out of the landline lock with the introduction of wireless services. In addition, there are satellite communications services which can compete with broadcast TV and radio. The essential ingredient is use of the electromagnetic spectrum to replace the physical cable connection. The microwave signals commonly in use spread out over a relatively large area, thus bringing the cost closer to that of central station equipment. On the other hand, wireless services are neither as secure nor reliable as physical landlines. Those major disadvantages of  wireless have been overcome as a result of recent developments in electronics and encryption which make very advanced signal processing cheap and lightweight. Competition among wireless providers is possible about to the same degree that multiple trunk lines are economic.

The foregoing analysis does not apply just to telecommunications. Essentially the same structural conditions exist in the provision of water, sewer, natural gas and electric power, except that these services cannot avoid the landline. (While electric power can be distributed by radiation rather than connection, the power density is very low, which is why solar cells are expensive to operate.) There are some facets of public utilities which might be subjected to competition with good results, but there are limiting factors. How would one know, for example, which utility supplied the water that comes out of the tap, if it were not the one that services the household's water pipe? Inability to answer this question is a strong reason for establishing a natural monopoly, and making the water company a regulated public utility. The same argument applies to other services.

This analysis also applies to other deregulated industries. When the airlines were deregulated, the airports and air travel infrastructure were not. The air traffic control system is like the system of roads, traffic lights and police established and maintained by government agencies for ground vehicles. The airports themselves cannot be separated from the traffic control system without major disruptions. Thus, only the most extreme (anti-government) free marketeers have proposed privatization or deregulation of the aeronautical infrastructure. Most people, including most technical experts, understand that both public safety and convenience are at stake in appropriate regulation of most of the aeronautical industry.

Going further, I am not alone in making arguments that the airlines should not have been deregulated. While there is sufficient demand in large urban centers - like the central telephone office - to justify multiple airline operators, service in outlying areas is like residential landlines in being too expensive for more than one operator. Consequently, as a result of defects and omissions in airline deregulation, airline service in many remote areas has been abandoned. Those rural areas that still have airports are usually heavily subsidized by Federal, State and local governments.

There are occasions of deregulation, but they have to be carefully selected and delimited. In most cases, there is a reason why public utilities are publicly regulated. In the late Victorian Era, when electricity was first mastered, the original private, unregulated electric companies served a small number of consumers in small areas. After electric service became a large, national business early in the Twentieth Century, governments started regulating the suppliers and almost every aspect of electricity use. It is only since Capitalists reinstated control of the United States after the election of Ronald Reagan, that anyone suggested deregulating and privatizing public utilities.

We have unnecessarily repeated history. Electric deregulation was never a good idea. It is failing because the electric power system is a natural monopoly best run by the government or closely regulated quasi-public companies.

WalterB - 13:42:47 - Sunday, 10/15/2006

Last update: 11/11/2007

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