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of competition on the electricity industry if the current monopoly franchise restrictions on

competition are eliminated. The final section describes the disadvantages of grafting

mandatory open access onto the current monopoly franchise system.

Electric Natural Monopolies Are Not Very Natural

According to mainstream economic theory, natural monopolies emerge when the

costs of producing additional output decrease as the quantity of output increases.8 Under

such cost conditions, two firms have higher costs than one firm, three firms have higher

costs than two firms, and so on. The result of competition between firms facing such cost

conditions is the survival of one firm and the bankruptcy of the others. Genuine natural

monopolies do not require government protection; no competitors enter the market

because, if they charge the same prices as the incumbent monopolist but split the market in

half, they will not make a profit.

However, many of the monopolies that exist today are not natural monopolies but

politically created monopolies. In the electricity industry, for example, the conventional

wisdom is that regulatory oversight was established by governments to protect customers

from abuse at the hands of exploitative utility monopolies. An examination of the

historical record, however, shows that government intervention was required to transform

a competitive electric industry into a monopoly.9 Competition thrived before the intro-

duction of public regulation. As economist Burton Behling noted, "There is scarcely a city

in the country that has not experienced competition in one or more of the utility industries.

Six electric light companies were organized in the one year of 1887 in New York City.

Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior

to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton,

Pennsylvania, had four in 1906."10

Economist Harold Demsetz notes that parallel or overlapping service, instead of

being a waste of resources, appeared profitable: "In fact, producing competitors, not to

mention unsuccessful bidders, were so plentiful that one begins to doubt that scale

economies characterized the utility industry at the time when regulation replaced market

competition."11 That implies that, if there was an "externality" at all, it was not the natural

monopoly characteristic of decreasing average cost over the relevant range of production.

Instead, the primary externality was the failure to define property rights in street access.12

If electric utilities were natural monopolies and state regulation had curbed their

economic power, electricity rates should have declined and the quantity of power supplied

should have increased. However, University of Rochester professor Gregg Jarrell found

that customers paid more for electricity after the arrival of rate-of-return regulation than

they had under the prior competitive system.