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Tuesday, June 5, 2012

Recovery : Regulating Utilities

Barry, My Liege :


'A public utility, or utility, is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies.' [wikipedia]

Public services regulated as monopolies in the United States have included water, sewer, electricity, natural gas, highways and roads, telephone and telegraph, airlines and railroads.

Often the service provided by the utility is a monopoly or oligopoly for a variety of reasons. One reason can be capital requirements : Perhaps the provision of the service requires huge capital investments such that the service provider could not attract the capital required to provide the service without a guarantee of returns to the capital providers. The guarantee is usually in the form that the provider will be insulated from competition.

Regardless of the reason for achieving or granting such monopolies or oligopolies, the effect is that the providers have such enormous power over customers that there is a great temptation to achieve monopoly profits by pricing the product or service at a higher price than would obtain in a competitive marketplace.

Monopoly profits can occur whether the industry is a monopoly or not. The test is whether the firm faces a sloping demand curve and can achieve monopoly-style profits by raising the price above and reducing the quantity sold below a competitive equilibrium.

If monopolies and oligopolies are allowed to earn monopoly style profits, the result will be greater inefficiencies in the market place and a transfer of significant portions of consumer surplus to monopoly profits; the effect would be to reduce middle class incomes further.

A common solution to this problem is to regulate the utility carefully so that it has the ability to earn a sufficient return to attract capital but is prevented from usurping consumer surplus into monopoly profits.

For example, many communities have Public Utility Commissions which regulate the pricing and practices of utilities. These are elected bodies which have the power to approve or reject rate changes and capital investments. This concept has been recognized in the United States for more than 100 years; for example, a Public Utility Commission was established as part of the Colorado Constitution adopted in 1876 as 2.26 ARTICLE XXV. Public Utilities.

When left to function in the public interest, these commissions frequently succeed in pricing the service close to what a competitive market might establish.

When that occurs, the public interest is served since the Utility is prevented from achieving monopoly profits.

In today's economy there are numerous examples of monopolies and oligopolies which do secure monopoly profits but are not regulated to prevent that occurrence.

My Liege, I think it is time to expand the number of industries subject to Public Utility Commission style regulation. Such an extension would reduce the accumulation of monopoly profits and the consequent reduction of middle class purchasing power. By that mechanism, we would see additional economic growth springing from an increase in middle class buying power.

And, I suggest we extend the candidates for such Public Utility Commission style regulation to include industrial products as well.

Utilities should include industries in which the final product or service is used by more than one third of the households AND in which the four firm concentration ratio exceeds 60%. Such a calculation will be allowed for city, county, and state as well as national public utility designations.

When considering industrial products which are not sold directly to households but are raw materials or components of other products, then we should consider only the concentration ratio. Whenever the revenues of the top four firms in such an industry exceeds say 70% of the total industry revenues, then the industry should be deemed a utility and a Public Utility Commission should be assigned to regulate it.

By adopting such a course, the United States of America will strengthen its Economic National Security by reducing the power of some monopolies and oligopolies to accumulate capital and by transfering some of that capital to consumers in the form of lower prices and greater access to products and services.

Your faithful servant,

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