Regulating Monopolies: A History of Electricity Regulation

Prof. Lynne Kiesling discusses the history of regulating electricity monopolies in America. Conventionally, most people view regulation of monopoly, such as the Sherman Antitrust Act, as one of government’s core responsibilities. Kiesling challenges this notion, and finds that government regulation of monopoly actually stifles innovation and hurts consumers.

The American electricity industry was booming in the 1890s, with several small firms competing against one another. Over time, Kiesling argues that the fixed costs began to escalate, increasing the cost of entry into the industry. Put another way, large competitors gained a significant competitive edge over smaller competitors through economies of scale. Eventually, in places like New York and Chicago, Kiesling claims that the competitive process led to one large firm.
These monopolies were feared by the public, and led to demands for government regulation. The electricity industry, knowing that regulation was coming, used these demands for regulation as cover to construct legal barriers to entry. Ultimately, the regulations passed by the government reduced competition by granting legal monopoly privileges to powerful firms within a certain geographical territory.
In modern times, we are seeing the real cost of these old one-size-fits-all regulations:
  1. People aren’t adjusting their energy consumption behaviors. For instance, in peak hours, technological solutions that could smooth electricity consumption are being ignored.
  2. The electricity industry doesn’t evolve and account for new types of renewable energy.
  3. Innovations have been discouraged.
If these archaic regulations were removed, innovations and improvements beneficial to consumers would flourish.
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