Energy and Competition: The Saga of Electric Power

• Author: James E. Suelflow,Roman A. Draba,Philip Fanara
• Published date: 01 March 1980
• Date: 01 March 1980
• DOI: http://doi.org/10.1177/0003603X8002500103
• Subject Matter: Article

The

Antitrust

Bulletin/Spring 1980

Energy and competition: the saga

of

electric power

BY

PHILIP

FANARA,

JR.

*, JAMES E. SUELFLOW**

and

ROMAN A. DRABA***

125

Technological changes and legal decisions are having profound ef-

fects on the organizational structure of the electric power industry.

The purpose of this article is to examine current public policy as it

interacts with these changes. The authors' contention is that the

rapidly rising demand for electrical energy that has occurred in the

last 20 years offers the possibility of a more competitive market

structure in the generation of electricity. In reality, however, the

trend in the industry's market structure has been just the opposite.

This trend has been brought about by allowing joint ownership

of

generating stations by investor- and publicly-owned utilities and if

continued may result in less competition with a subsequent change

in the traditional regulatory framework

and

higher prices for elec-

trical energy. Therefore, an investigation

of

the impact

of

these

developments is undertaken in order to clarify the policy decisions

that must soon be confronted.

*Assistant Professor, Department

of

Business Economics, University

of Maryland.

**Professor,

Department

of

Transportation

&Public Utilities,

Graduate School of Business, Indiana University.

***MBA, graduate

of

Indiana University.

Ie) 1980 by Federal l.cgal Publication-••

In",'.

126 The antitrust bulletin

I.

Traditional

rationale

for

regulation

Traditionally, regulation has been justified when an un-

wanted externality has been exhibited in a particular market; in

other words, when the market fails to perform in the most

efficient manner. For public utilities, this market failure has

been attributed to the existence of a natural

monopoly-when

the range

of

demand for the output of a particular industry

does not extend beyond the area of decreasing costs or techno-

logical limitations making two or more suppliers cumbersome.

In the former, demand does not extend beyond the range of

cost where marginal cost is below average cost. While in both

instances the market or society can support only one firm.

Therefore, if these natural monopolies are left to the vagaries

of

competitors' wasteful duplication, destructive competition will

appear with the final result being a market dominated by one

firm. At the very heart of the traditional theory' is the objective

that this market must be regulated in order to eliminate exces-

sive profits.

The existence

of

the concept of decreasing costs (or econo-

mies of scale) in the electric power industry has long been

regarded as absolute. Indeed, the driving force behind decreas-

ing costs-i.e., heavy fixed costs as a proportion

of

total

costs-

certainly has been exhibited in the past. 2

IAlthough the concept of natural monopoly has traditionally been

the prime rationale for economic regulation, note that this concept has

been much criticized and other theories of regulations' existence have

been proposed. See Harold Demsetz,

"Why

Regulate Utilities?" 11

Journal

of

Law and Economics 55-66 (April 1968);

and

George

Stigler,

"The

Economic Theory

of

Regulation," 2Bell Journal

of

Economics and Management Science 3-21 (Spring 1971). These criti-

cisms notwithstanding, the idea

of

the protection

of

the public interest

by preventing the earning of excessive profits by the firm (be it a

natural monopoly or not) has remained the most persuasive argument.

2See L.R. Christensen and W.H. Greene, "Economies

of

Scale in

U.S. Electric Power Generation," 84 Journal

of

Political Economy

655-676 (August 1976).