Introduction to Competition and the Regulation of Utilities

Abstract

Traditionally, the very idea of competition having any impact on the regulation of utilities was antithetical to the basic philosophy of utility regulation. The institution of regulation had developed because there was a problem with competition. Because of overwhelming scale economies in traditional utilities, monopoly was the natural order of things. Natural monopoly was a considered a classic example of market failure—where the free interplay of market forces did not yield the efficient outcome associated with competition. Thus, the failure of the free market outcome resulted in (natural) monopoly, with the resultant inefficiency and inequity. From an economist’s point of view, regulation was seen as a way of resolving the pricing or allocative inefficiency resulting from natural monopoly.¹Regulation apparently served not only to protect the interests of consumers but also to provide guarantees to the regulated monopolist. In this vein, regulation was perceived as an efficient governance structure, at least when compared with alternatives like franchise bidding (Williamson 1976)