2 The Traditional Utility Monopoly

• Author: Scott Hempling
• Pages: 13-67

2.A. Exclusive retail franchise

2.A.1. Exclusivity express in statute

2.A.2. Seven variations on exclusivity

2.A.3. Franchise revocation

2.A.4. Regulatory options for franchise accountability

2.B. Obligation to serve

2.B.1. The anti-discrimination objective

2.B.2. The citizen access objective

2.B.3. The economic development objective

2.B.4. Limits on the obligation to serve

2.B.5. Contracts that undermine the obligation

2.C. Consent to regulation

2.D. Quality of service

2.D.1. Statutory bases

2.D.2. Components of quality: Traditional and new

2.D.3. Regulatory requirements

2.E. Eminent domain

2.E.1. Power, purposes and limits

2.E.2. Public–private overlap

2.E.3. Federal roles

2.F. Limited liability for negligence

2.F.1. General limitation and its justications

2.F.2. Parties and defenses

2.F.3. Exceptions to the general rule

2.F.4. No immunity: Gross negligence

2.F.5. Federal–state relations

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The Traditional Utility Monopoly

CHAPTER TWO

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[F]ar from affecting the public injuriously, [the government-granted franchise] has become

one of the most important agencies of civilization for the promotion of the public con-

venience and the public safety.1

For most of the twentieth century, the market structure faced by most retail consumers of

electricity, gas, telecommunications and water was a monopoly. The incumbent provider

was a vertically integrated company, government-selected, providing prescribed services

within a dened territory at approved prices. Supporting this market infrastructure was a

legal infrastructure, called a franchise: a “special privilege,” granted by the state govern-

ment to the utility, to provide dened services subject to dened obligations.2

The franchise relationship comprises rights, obligations, powers and protections, all

designed to align the incumbent’s self-interest with the public interest. It typically has

seven distinct dimensions:

1. Exclusive retail franchise: The utility’s right to be the sole provider of a govern-

ment-prescribed service within a state-dened service territory.

2. Obligation to serve: The utility’s obligation to serve all customers in that service

territory, without undue discrimination.

3. Consent to regulation: The utility’s consent to all reasonable regulation.

4.

Quality of service: The utility’s obligation to meet service quality standards estab-

lished by the regulator.

5.

Power of eminent domain: The utility’s power to take private property when

necessary to satisfy its public service obligation.

6. Limit on liability: The utility’s protection from lawsuits for ordinary negligence.

1. New Orleans Gas Co. v. La. Light Co., 115 U.S. 650, 669 (1885).

2. See id. at 669 (describing a franchise as “belonging to the government, to be granted, for the accom-

plishment of public objects, to whomsoever, and upon what terms it pleases”); Bank of Augusta v. Earle,

38 U.S. (13 Pet.) 519, 595 (1839) (describing franchises as “special privileges conferred by government

upon individuals, and which do not belong to the citizens of the country generally of common right”).

Courts also have distinguished a “franchise” from a “license.” In McPhee & McGinnity Co. v. Union

Pac. R.R. Co., 158 F. 5, 10 (8th Cir. 1907), the Court explained that while a franchise is

[a] right or privilege which is essential to the performance of the general function or purpose of the

grantee, and which is and can be granted by the sovereignty alone, such as the right or privilege

of a corporation to operate an ordinary or commercial railroad, a street railroad, city waterworks

or gasworks, and to collect tolls therefor, . . . [a license is a] right or privilege not essential to the

general function or purpose of the grantee, and of such a nature that a private party might grant

a like right or privilege upon his property, such as a temporary or revocable permission to occupy

or use a portion of some public ground, highway, or street. . . .

Chapter Two14

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7.

Just and reasonable rates: The utility’s right to charge rates set by the regula-

tor, designed to provide a reasonable opportunity to earn a fair return on equity

investment.

This Chapter discusses the rst six dimensions of the monopoly franchise and their many

variations. Chapters 3, 4 and 5 address policymakers’ efforts to introduce competition

into these historically monopoly markets. Just and reasonable ratemaking will occupy

Chapters 6–11.

2.A. Exclusive retail franchise

A retail franchise is exclusive when the state (a) denes a geographic area, (b) prohibits

retail competition for a particular set of services within that area, and (c) appoints a com-

pany to be the sole seller of those services. While the term “exclusive” sounds absolute,

it is a theme with variations. After illustrating exclusivity granted expressly by statute,

we discuss seven variations. Each variation injects uncertainty or impermanence. The

ultimate in impermanence is the state’s power to revoke a franchise and transfer it to a

better performer.

2.A.1. Exclusivity express in statute

South Dakota’s statute grants an electric utility company the sole right to serve in its

assigned territory, permanently:

Each electric utility has the exclusive right to provide electric service at retail at each

and every location where it is serving a customer as of March 21, 1975, and to each and

every present and future customer in its assigned service area.3

For existing and new customers, the incumbent utility is the only option.

Until when? Legislatures have three options and a variation on them. First, where the

statute grants exclusivity with no express term limit (the South Dakota situation), exclu-

sivity lasts until the Legislature changes the statute. Second, the statute could x the term;

Nevada’s statute prescribes 50 years.4 Third, rather than xing the term, the statute could

authorize the Commission to set the term, thus implicitly or explicitly allowing rivals to

compete periodically to be the next franchisee. (See the discussion of franchise compe-

tition at Chapter 2.A.2.f below.) Finally, each of these approaches could authorize the

3. S.D. C L § 49-34A-42.

4. See N. R. S. § 709.210 (“If, upon the hearing of the application, it appears to the satisfaction of

the board of county commissioners that the applicant is engaged in the business of furnishing electric

light, heat or power within two or more counties of this state and that the granting of the franchise is

in the best interests of the residents of the county, the board of county commissioners shall thereupon

grant the franchise for a term not exceeding 50 years.”).

15The Traditional Utility Monopoly

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