Local distribution companies may face difficulties when their requirement to serve, which was imposed in exchange for franchise monopoly in many utility sectors, is maintained, but restructuring eliminates their direct control over electricity supplies, as evidenced by California utilities in 2000–2001. In California, for example, reserve margins and hence system operating costs have increased as a result of moving to a dispatch market. For example, substitution of market mechanisms for internal decision-making or ‘command and control’ by a vertically integrated firm may increase coordination costs in electricity markets (Joskow in Peltman and Winston 2000). While competition may enhance cost efficiency in the deregulated sector, restructuring may increase other costs. In electricity markets, for example, the relative sizes of different suppliers, their inframarginal capacity, the use of long-term hedging contracts between generators and their customers, and the degree to which customers see and can respond to real-time price variation have all been demonstrated to influence the exercise of market power. These include the way the competitive sector is structured, the terms on which suppliers interface with their customers and the network, and the management of network investments. There is growing evidence that performance variations are heavily dependent upon the institutional details of the market's design. While many restructured markets have been prone to supracompetitive prices, the extent to which price exceeds cost varies tremendously across different settings. 2000, Joskow in Peltzman and Winston 2000, and Joskow and Kahn 2001).
Natural monopoly generator#
There is considerable evidence of generator market power in many markets, with generators bidding above their marginal generation costs and strategically withholding capacity from the market to increase prices (see Wolfram 1999, Borenstein et al. In most restructured electricity markets, unregulated generators bid to supply electricity to the system operator, which determines the dispatch order of generators to supply the electricity demanded at each moment in time. Some economists have suggested that this reflects relatively weak competition among the small and decreasing number of existing long-distance providers.Īnalyses of electricity markets echo this theme.
In the US long-distance telephone market, for example, AT&T lost its sanctioned monopoly provider status in 1984, following the earlier technological erosion of its ‘natural monopoly.’ While long-distance prices have declined, the convergence to competitive norms has been relatively slow, with average per-minute prices more than double estimated long-run incremental costs as late as 1998 (Peltzman and Winston 2000, p.
Empirical research suggests these markets have yet to converge to competitive ideals. Action on these concerns was facilitated by technological innovations that reduced scale economies at certain production stages and enabled decentralized operations to achieve many of the economies of scope previously attained by vertically integrated firms.Įconomists have been especially interested in assessing the competitiveness of restructured markets. In other cases, apparently high prices may in part reflect perverse regulatory pricing schemes. In some cases, this reflects real operating inefficiencies and reduced innovation under monopoly. Much of this policy movement appears stimulated by concerns that prices charged by monopoly providers were too high, relative to those attainable by privately-owned firms operating in competitive sectors.
Power generation has been divested from transmission and distribution functions and opened to competition in many electricity systems. In telecommunications, equipment provision and long-distance service were among the first to be carved out of vertically-integrated telecommunications firms and opened to competitive suppliers. Vertical restructuring has become common in natural monopoly industries worldwide. Rose, in International Encyclopedia of the Social & Behavioral Sciences, 2001 3.2 Performance in Restructured Natural Monopoly Sectors
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