When governments own utilities outright, there is greater investment in renewable energy because the funds that would otherwise go to high executive salaries can be used in other ways. Also, government-owned utilities tend to have more workers, so that in the aftermath of a natural disaster, recuperation is quicker. Also, privately owned utilities tend to exert extensive influence on the political system, a situation that does not exist when the utility is publicly owned.
On the other hand, publicly owned utilities are not so perfect. They are reluctant to raise rates to improve infrastructure, and are less likely to comply with regulations that burden citizens.
But according to a forthcoming paper in the American Journal of Political Science,the public utility model has some drawbacks, too. Its reliance on public support can compromise its ability to make crucial infrastructure upgrades. As a result of poor funding, public utilities can also fail to meet federal public regulations. And yet regulators are more lenient with them than with private utilities, since harsh punishment only further hurts the public.
Public utilities do have their virtues. They impose lower rates upon poorer customers and encourage conservation.
Indeed, because private utilities prioritize their investors rather than their customers, they have little incentive to create, for example, tiered rate structures that are crucial for low-income households. “Low-income pricing schemes and rebate schemes and retrofitting—those are not going to be something the investor engages in, unless they have that in their contract with the municipality,” says Teodoro.
Public utilities do another thing that private utilities have little incentive to do: conserve. To use the example of water again, Americans’ per capita daily water use has plummeted in the last several decades—largely a triumph of conservation efforts by public utilities. “In what other business do people say, ‘Please buy less of our product’?” says Teodoro. “No private utility would ever do that.”
Perhaps both systems are equally bad, the only difference between them being that they benefit different types of insiders. In the public utility model, the taxpayer is milked by civil servants and trade unions, whereas in the private utility model, the ratepayer is exploited by corporate executives and shareholders. Measles and mumps.
The difference is in where the rents go. In a public ownership model, typically management will team up with the rank-and-file workforce to divide the spoils. In a regulated monopoly model, management has more incentives to squeeze compensation and divide the spoils with shareholders instead. That is obvioulsy a very important difference to the specific people involved. But in terms of the public interest you are stuck with the problem of basic institutional quality and good governance. Here in the D.C. area, we run PEPCO as a regulated private and PEPCO has a ton of problems. We run WMATA as a publicly owned entity and WMATA has a ton of problems. In both cases, there appears to be systematic underinvestment in basic infrastructure and capacity. In WMATA's case the workforce benefits from that (see, e.g., the terrible escalator management system) while for PEPCO the gains accrue more to shareholders.
This Slate article inspired a counter-argument in Forbes that asserted that the level of regulation that is applied to a company should depend on whether or not the industry in question is a "natural monopoly". In some markets, serious competition is unrealistic because of the high cost of entry for newcomers. For instance, in terms of delivering water, electricity, natural gas or telephone service, no competitor can build new infrastructure to compete with preexisting pipes and wires. Natural monopolies should therefore be run as regulated, for-profit private utilities; all other sectors of the economy, including power generation, should be left to market competition.
In the US a utility is usually made up of two things, power generation and power distribution. It is true that, to a very large extent (large consumers like industry much less so, households definitely so), power distribution is a natural monopoly. There's not going to be enough gains from competition to cover the cost of having two sets of power distribution lines. Thus we never do end up with two sets of power distribution lines. Thus they're all natural monopolies.
But feeding the power into those lines is not a monopoly in any manner at all. There's absolutely no reason at all why the people who generate the electricity (whether it be from solar, wind, coal, gas, nuclear) should be the same people who own the power lines. It's just fine to have an open and competitive market in power generation: it's that distribution part that you've got to watch.
Thus this is the part that you've got to solve before you decide upon the public or private nature of the monopoly: stripping out the parts that are not monopoly and leaving them to regulated by the competition of the market. Which leads to something along the lines of the English electricity market. The National Grid is privately owned, is a monopoly, and is highly regulated as to rates of capital return and so on.
Power generation operates in a free market (subject to all the usual rules on safety etc) and the price which the grid can charge for carrying the power is regulated. It's important to make sure that no one is allowed to own sufficient of the generating capacity to be able to dictate prices. Further, to make absolutely certain that the grid cannot own any power stations.
But once you've done that you've reduced the problem to manageable proportions. For example, your power regulators don't have to worry themselves about the price of electricity: that's set by the market. The regulatory control only has to be over the part which really is the monopoly.
Interestingly, the idea of public ownership of utilities disappeared in this Forbes article. The Slate article questioned the worth and dubious motives of both public utilities and private utilities, whereas the Forbes article responded that the merits of private utilities and open markets depend on context.
This incongruous response does the service of introducing the third option -- open market competition -- which is absent from most of the debates on the value of public, government-owned utilities versus private, for-profit utilities.
Historical context is also missing from the conversation.
There seems to be a tendency for bold new technologies to create temporary monopolies.
Perhaps the single greatest example of this is the rise of the railroads in the USA in the aftermath of the Civil War. The railroads were unique in that they not only overshadowed the transportation sector, but they also dominated the general economy (e.g., agriculture) and the political system (supposedly every congressman and governor was on the payroll of railroads). This development set the stage for a strong regulatory federal government. (Another notorious example is the Standard Oil monopoly.)
Anti-monopoly legislation either 1) regulates an industry as though it were a private, for-profit utility, or 2) breaks conglomerates into competing companies (and prevents mergers).
These two policies stands in contrast to the practice, more common in other societies, of nationalizing sectors like oil production and railroads and placing them under government ownership. American railroads were temporarily nationalized during the First World War.
The United States Railroad Administration (USRA) temporarily took over management of railroads during World War I to address inadequacy in critical facilities throughout the overall system, such as terminals, trackage, and rolling stock. President Woodrow Wilson issued an order for nationalization on December 26, 1917.[40] Management by USRA led to standardization of equipment, reductions of duplicative passenger services, and better coordination of freight traffic.[28]:175Federal control of the railroads ended in March 1920.
But the initial policy toward railroad monopolies was indirect control by a government commission that enforced extensive regulations -- essentially, the private utility model.
The Interstate Commerce Act of 1887 is a United States federal law that was designed to regulate the railroad industry, particularly its monopolistic practices.[1]The Act required that railroad rates be "reasonable and just," but did not empower the government to fix specific rates. It also required that railroads publicize shipping rates and prohibited short haul or long haul fare discrimination, a form of price discrimination against smaller markets, particularly farmers in Western or Southern Territory compared to the Official Eastern states.[2][3] The Act created a federal regulatory agency, the Interstate Commerce Commission (ICC), which it charged with monitoring railroads to ensure that they complied with the new regulations.
The Act was the first federal law to regulate private industry in the United States.[4] It was later amended to regulate other modes of transportation and commerce.
The railroads responded by increasing coordination with one another, especially on rates. This was deemed by the federal government to be an attempt at further monopoly, and it triggered antitrust legislation.
Morgan set up conferences in 1889 and 1890 that brought together railroad presidents in order to help the industry follow the new laws and write agreements for the maintenance of "public, reasonable, uniform and stable rates." The conferences were the first of their kind, and by creating a community of interest among competing lines paved the way for the great consolidations of the early 20th century.[34]:352–96Congress responded by enacting antitrust legislation to prohibit monopolies of railroads (and other industries), beginning with the Sherman Antitrust Act in 1890.
The goal of antitrust legislation is to foster competition within an industry. This diverged somewhat from the earlier strategy of indirect government control via a regulatory commission.
United States antitrust law is a collection of federal and state government laws that regulates the conduct and organization of business corporations, generally to promote fair competition for the benefit of consumers. (The concept is called competition law in other English-speaking countries.) The main statutes are the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914. These Acts, first, restrict the formation of cartels and prohibit other collusive practices regarded as being in restraint of trade. Second, they restrict the mergers and acquisitions of organizations that could substantially lessen competition. Third, they prohibit the creation of a monopoly and the abuse of monopoly power.
The railroads were eventually deregulated in the 1970s and 1980s.
Congress passed various railroad deregulation measures in the 1970s and 1980s. The Railroad Revitalization and Regulatory Reform Act of 1976 (often called the "4R Act") gave railroads more flexibility in pricing and service arrangements. The 4R Act also transferred some powers from the ICC to the newly formed United States Railway Association, a government corporation, regarding the disposition of bankrupt railroads.[19] The Staggers Rail Act of 1980 further reduced ICC authority by allowing railroads to set rates more freely and become more competitive with the trucking industry.
The oil industry, in contrast, was never governed by a regulatory commission. Accusations of monopoly leveled against Standard Oil led straight to the enactment of antitrust laws.
The assumption that railroad and oil monopolies could be broken up into competing segments might be evidence of the maturity of the technology and the industry in question. Governments, via regulatory commissions, seek not only to control and guide, but also to protect utilities. But natural monopolies eventually become unnecessary in the face of economic growth and diversification. For example, Standard Oil had already lost significant market share by the time it was dismembered by the federal government.
Some economic historians have observed that Standard Oil was in the process of losing its monopoly at the time of its breakup in 1911. Although Standard had 90 percent of American refining capacity in 1880, by 1911 that had shrunk to between 60 and 65 percent, due to the expansion in capacity by competitors.Since the breakup of Standard Oil, several companies, such as General Motors and Microsoft, have come under antitrust investigation for being inherently too large for market competition; however, most of them remained together.[53][54][55] The only company since the breakup of Standard Oil that was divided into parts like Standard Oil was AT&T, which after decades as a regulated natural monopoly, was forced to divest itself of the Bell System in 1984.
Some industries are unique in that they remain at length in the natural monopoly stage and cannot be broken into competing parts. For example, the antitrust model is still not applied to fields like water and energy distribution, where the technology has not appreciably evolved. In these cases, the regulated private utility model seems more appropriate.
But change happens. Once the technology does advance and complexify, the sector in question no longer resembles a natural monopoly. At that point, the monopoly is dismantled in favor of a competitive marketplace. This happened to the railroad industry, and also to telephony. Although telephony is still often categorized as a natural monopoly, in the 1980s, AT&T's Bell System was broken up into competing phone companies; the technology had become much more sophisticated to allow for this (especially later with the emergence of cell phones). Likewise, in the future, as the cost of atmospheric water generation falls, water distribution may cease to be perceived as a natural monopoly and become subject to market competition. (The future of water markets may see increasing distributed generation coinciding with decreasing consumption -- the same two trends that have taken hold in energy markets in the developed world and, recently, in the developing world, as well.)
Even without antitrust legislation, some monopolies are simply overcome by market competition. For example, Ford Motor Company maintained a monopoly on automobile manufacture in the USA because it had pioneered mass production in that sector, but soon enough competitors like Dodge emerged. Likewise, Apple had a monopoly on smartphone production with its creation of the iPhone in 2007, but within a few years, the Android system developed by Google provided alternatives. Facebook invented social media and initially dominated that field, but today half of American teenagers do not use Facebook because there are alternatives.
In sum, there might be two initial stages in the development of new technologies: 1) the early monopoly phase, followed by 2) market competition (either imposed by the government or created by the emergence of competitors).
Heavily regulated, private, for-profit utilities exist for natural monopolies in which competitive markets are -- as yet -- unrealistic. But technological change is inevitable. Over time, these natural monopolies disappear with the emergence of new technology and become open to market competition (e.g, AT&T in the 1970s, energy distribution today, water distribution tomorrow).
But there might be a third stage: 3) eventual mainstream obsolescence and government ownership.
Classic state institutions, such as the military or the postal service, are typically services that have been deemed to be incapable of existing outside of government ownership, neither as natural monopolies nor within competitive markets. This may be the eventual fate of some once-dominant technologies. Although they may inevitably become marginal or even obsolete for mainstream consumers, they are nevertheless seen to serve an essential function for disadvantaged communities.
This is exemplified by the fate of passenger railroads in the USA, notably in the creation of Amtrak in 1971 as a government-owned and subsidized for-profit corporation (freight rail was fully privatized and thrives). Amtrak turns a profit in the population-dense northeastern USA, but everywhere else it requires subsidies. These subsidies are primarily supported by Republican congressmen who represent rural constituencies that have few transportation options.
By this logic, the oil companies, the automobile industry, telephony, social media and the Google search engine may someday become government agencies that will primarily serve the disadvantaged. (In this vein, it has been argued that Twitter has no real market potential, and yet it serves a valued public function, and that it should be made either a government service or a non-profit, like Wikipedia.) All of this might sound odd today, but imagine going back to 1881 and predicting that within 100 years the mighty railroads will have become wards of the state.
Another pattern in the emergence of new technologies and the temporary monopolies that they give rise to is the increasing irrelevance of monopoly. Each succeeding monopoly is less central to the economy and more transient in its domination of markets than prior monopolies were. This is because these new technologies emerge in the context of a growing and diversifying economy.
-The railroads became central to the American economy, and this centrality and dominance persisted.
-The same is true with Standard Oil, although Standard Oil was not as dominant as the railroads.
-Ford Motor Company was even less dominant in the US economy than railroads and oil, despite the transformations it wrought.
-The telephone companies were even less central to the American economy than railroads, oil and automobiles were.
-Microsoft in the 1990s was widely seen as a monopoly in the realm of personal computing. But personal computing was once seen as a hobby, and was never central to the economy. (In fact, Microsoft made possible personal computing for the masses by destroying Apple's monopoly, despite Apple advertising itself as a populist force against the likes of IBM.) Microsoft now seems to have slid into the backdrop of the tech industry, perhaps due in part to regulatory scrutiny, but also because of the proliferation of other products. (In the history of the smartphone, one can perceive not only Microsoft's accelerated irrelevance, but also the decentering of Apple as Android system phones captured half the smartphone market within four years of the release of the iPhone.)
This raises a question. It has just been asserted that the transition from stage one (when a revolutionary technology creates a monopoly) to stage two (when the market in question becomes open to competition because of innovation) has accelerated over the course of history, with more recent monopolies losing their grip on their market share more rapidly than prior monopolies did. But does this also mean that the transition from stage two (market competition) to stage three (government takeover of an industry in decline) has also accelerated historically? It is too early to tell, but that second transition (to state ownership) might not be long in coming after the first transition (to the market).
And what about utilities in particular? Once again, utilities as private, for-profit corporations signify that a technology is still stuck in the first stage of development -- (natural) monopoly. The technology has not advanced to the point that it may progress to the second stage -- market competition.
Energy utilities today seem to be on the verge of entering the second stage, that of market competition. Perhaps the best example of potentially disruptive new energy distribution technology is the microgrid, in which a localized group of contiguous electricity producers and consumers -- within a neighborhood, a college campus or a military base, for example -- are linked together on a common grid that complements the utility's greater grid. Among other benefits, a microgrid provides one level of the three levels of redundancy that ensure security: 1) household generation and storage, 2) the community microgrid, and 3) the utility's overall grid.
Microgrid is a localized group of electricity sources and loads that normally operates connected to and synchronous with the traditional wide area synchronous grid(macrogrid), but can also disconnect to "island mode" — and function autonomously as physical and/or economic conditions dictate.
In this way, a microgrid can effectively integrate various sources of distributed generation (DG), especially Renewable Energy Sources (RES), and can supply emergency power, changing between island and connected modes.
Even as the costs of and technical challenges posed by microgrids continue to diminish, legal obstacles remain.
https://www.greentechmedia.
Those legal problems will be resolved. Energy utilities as distributors will then face competition from microgrids. At that point, the way that energy utilities are regulated will change, and the private utility model will give way to market competition between various distributors. (This would negate the Forbes article, which argued that energy distributors, as natural monopolies, should be regulated private utilities, whereas energy suppliers who use the utility's grid should enjoy open market competition.)
The main utility would not disappear, however. It would still supply the general population. More specifically, it would supply a small segment of the population that is disadvantaged and cannot self-supply at the household or microgrid levels. Under public pressure, the private utility would transform into a government agency.
https://www.greentechmedia.
Those legal problems will be resolved. Energy utilities as distributors will then face competition from microgrids. At that point, the way that energy utilities are regulated will change, and the private utility model will give way to market competition between various distributors. (This would negate the Forbes article, which argued that energy distributors, as natural monopolies, should be regulated private utilities, whereas energy suppliers who use the utility's grid should enjoy open market competition.)
The main utility would not disappear, however. It would still supply the general population. More specifically, it would supply a small segment of the population that is disadvantaged and cannot self-supply at the household or microgrid levels. Under public pressure, the private utility would transform into a government agency.
Certain developments in the energy field -- reduced consumption, distributed generation -- have been promoted by governments. But these developments are also the inevitable outcome of technological progress and greater efficiencies that would have happened even without government intervention. Through its intervention, the state has merely accelerated the evolution of energy technology. Again, the evolution of bold new technologies develops according to the stages of:
1) monopoly upon emergence,
2) market competition as technical sophistication accrues, and
3) state ownership as the technology becomes obsolete to the mainstream but remains an essential service for disadvantaged communities.
In the energy sector, stage two could be commencing. Stage three could be ... not far behind.
