MONOPOLIES IN AMERICA: EMPIRE BUILDERS AND THEIR ENEMIES FROM JAY GOULD TO BILL GATES. By Charles R. Geisst. New York: Oxford University Press. 2000. Pp. x, 355. $30.
POWER LOSS: THE ORIGINS OF DEREGULATION AND RESTRUCTURING IN THE AMERICAN ELECTRIC UTILITY SYSTEM. By Richard F. Hirsh. Cambridge: MIT Press. 1999. Pp. x, 406. $55.
THE NATURAL GAS MARKET: SIXTY YEARS OF REGULATION AND DEREGULATION. By Paul W. MacAvoy. New Haven: Yale University Press. 2000. Pp. xv, 140. $35.
Over the last thirty years, regulators have deregulated just about every regulated industry. In no industry has deregulation raised as much fear and concern as in electric power markets. Even before the Enron debacle, a crisis that is more about the failures of corporate than regulatory law, (1) it was clear that something had gone seriously wrong in the turn towards deregulation of electric power.
Recent events in California are illustrative. In early 2000, consumers in California, the first state to deregulate retail power markets on a mass scale, saw repeated months of power interruptions. Many utility customers experienced a risk of service shut off--some even had their service interrupted--forcing changes in daily routines to find access to electric power. (2) Hospitals, nursing homes, and municipal utilities controlling sewage and water treatment facilities were forced to make choices affecting human safety when confronted with the prospect of power interruption. (3) Small businesses, families, and large corporations incurred large costs. (4) The consequences of California's regulatory system were not limited to utility consumers. One of the state's largest utilities, Pacific Gas & Electric ("PG&E"), declared bankruptcy on April 6, 2001, in part the result of the skyrocketing power procurement costs it has incurred in the deregulatory environment. Its reorganization is now before a federal bankruptcy court. (5)
Newspaper, television, and radio headlines overwhelmingly attributed the California power crisis to deregulation, or economic restructuring, of power markets to favor competitive markets over government regulation as a means for allocating power supply. Against the backdrop of such events, calls for a return to old-style regulation have abounded, often attributing the root cause of California's energy woes to deregulation itself. (6) Even regulators who are not inclined completely to abandon deregulation continue to struggle with refining the basic path of deregulatory policies, advocating deregulatory models that incorporate state participation in power procurement, price caps, or other regulatory safeguards in designing power markets.
The serious book on electric deregulation's failures has yet to be written--indeed, it will be several years before a comprehensive scholarly account is available--but this Essay uses three recent books on the history of regulated industries to address what went wrong in the turn toward deregulation of electric power. (7) The history of utility regulation, addressed in recent books, is a useful place to begin in assessing the problems regulators face today. If that history teaches us anything, it is that firm organization in capital-intensive industries is cyclical and evolutionary, and often influenced as much by technological change as by greed or politics.
The history of regulation also teaches us that regulatory policy--including deregulation--is not made in a jurisdictional vacuum. A statutory framework defined in Part II of the Federal Power Act, a New Deal-era statute enacted by Congress in 1935, gives federal regulators extensive powers but also places authority over many electric power policies in the hands of the states. (8) To the extent that state, rather than federal, policymakers are fashioning policies, different jurisdictional fora will produce many of the regulatory frameworks for electric power. If extreme or parochial factions, as may be more likely in state as opposed to national politics, successfully capture front-end market design of power markets, state politics is more likely to lead to dysfunctional markets than national approaches to restructuring.
I shall argue that, although wrong-headed deregulation policies contributed to California's crisis, the California deregulation fiasco illustrates the significance of the political process that produces the substance of economic regulation. Because it defines the jurisdictional scope for this process, the legal resolution of jurisdictional boundaries plays a significant role in the development of sound deregulatory policies. The law of regulatory federalism--defined broadly to include federal preemption doctrine, the dormant commerce clause, and state action immunity to antitrust enforcement--should find ways to encourage desirable participation and discourage undesirable interest group capture of the state political process. Regulatory federalism doctrines, central to current disputes involving electric power before the federal courts, are largely downplayed in the literature on the history of monopoly and regulation, including the three books reviewed in this Essay. The recent disputes in electric regulation challenge future authors to write the long overdue chapter on how jurisdictional boundaries have adversely affected economic regulation of the electric power sector, as well as other regulated industries.
THE HISTORY OF NATURAL MONOPOLY IN THE ELECTRIC UTILITY CONTEXT
Monopolies in America: Empire Builders and Their Enemies from Jay Gould to Bill Gates is another tour de force by Charles R. Geisst. (9) Geisst begins his account with reference to the motto of the popular board game Monopoly (10)--"Accumulate as much property as possible and win" (p. 1)--which he sees as strikingly consistent with the principles of monopolistic industries. Geisst admirably traces the evolution of monopolies and their control in the U.S., focusing on legal and political efforts to effectuate control over the monopolistic tendencies he sees as inherent in capitalist economies. A colorful illustration of some of the most influential industrial and financial titans in U.S. history--Cornelius "Commodore" Vanderbilt, Jay Gould, J.P. Morgan, John D. Rockefeller--as well as the effort of courts and legislators to curb their power, Geisst's account spans more than a century, but it does not delve in depth into any period or specific legal doctrine. Much, if not most, of his effort focuses on antitrust enforcement.
Throughout the book, however, he also touches on regulated utilities, monopolies that are not targeted by antitrust enforcers but are instead granted and protected by law. His illustrations include traditional public utility industries, such as railroads, telecommunications, and the electric power industry. Geisst briefly explains, for example, that for most of the twentieth century, and to a degree even today, electric power was provided by the investor-owned "public utility." Under this firm structure, which was reinforced by regulatory law, high degrees of vertical and horizontal integration were the norm. A private company offered consumers a bundle of services, including generation, distribution, and transmission, typically while operating as a monopolist serving a geographic service territory subject to heavy regulation by federal and state agencies. For most of the twentieth century, this regulatory regime was stable for both the investor and the consumer. Utility stocks were notoriously low-risk, reliable investments, thus explaining the cheapness of the public utility square on the Monopoly board. With few exceptions, electric utilities were well suited to providing consumers with reliable, dependable electrical service. (11)
Geisst weaves a fascinating story, describing through anecdotes the historical development of government regulation of monopolies such as electric power. His history is robust in scope, touching on dozens of industries, including not just traditional public utilities but also book publishing, computer, and food manufacturing industries. His general thesis is that "[m]onopoly is the logical outcome of free market economic organization" (p. 319). More specifically, he sees regulation as "the antidote if that power overextends itself and ceases to provide benefits" (p. 319). Since Geisst understands regulation as largely serving political goals, he is able to weave an intriguing story through many colorful historical and political anecdotes. His book provides an easily accessible and nicely pitched popular history or introduction for a lay audience.
The book charitably introduces monopoly's early critics. Geisst summarizes many of the arguments made by Charles Francis Adams, Jr., who wrote a series of essays illustrating the financial problems that monopolies, especially the railroads, posed during the Guilded Age (pp. 18-23). The origins of regulation, on Geisst's account, were predominantly ideological and political, rather than economic: "From the beginning of the battle, economics and ideology would be mixed in an acrimonious argument about who knew what was best for the country" (p. 23). But on Geisst's account, economics took a backseat to political ideology. Adams and others who pushed for state regulation (12) were, according to Geisst, reformers driven predominantly by their progressive political beliefs. (13)
With masterful attention to detail, Geisst provides an account of regulatory and antitrust law as mediating between tempered private competition, which is permissible, and the accumulation of power by industrial firms, which Geisst deems undesirable. In both its early accounts and later descriptions of the development of antitrust law and regulation, however, Geisst's book gives little attention to more rigorous methodological accounts of the goals of antitrust or regulatory law. Like many other historical accounts, it fails to present a coherent economic theory of monopoly or...