The ongoing nationwide power distribution crisis is a perfect illustration of how monopolies can hurt consumers.

LOS ANGELES · Days of tropical heat and humidity have driven demand for electricity to record highs in California and other states. If people can't take the weather anymore, neither could transformers and other equipment, which sputtered and shorted out and left tens of thousands of people without power.

Authorities issued a warning Monday that the high demand could lead to rolling blackouts, a dreaded term in California that brings reminders of widespread blackouts in 2000 and 2001 during an energy supply crisis.

In other parts of the country, thunderstorms have compounded problems, leaving hundreds of thousands of people in the St. Louis area without electricity since Wednesday. Thousands of people in Queens, N.Y., entered the second week without power after equipment failures there at one point left about 100,000 people without electricity.

Unfortunately, because power distribution (and to a lesser extent, power generation) is typically a "natural" monopoly, there isn't much that can be done to improve the situation over the long term -- i.e., this just about is the best we can do.

In economics, a natural monopoly occurs when, due to the economies of scale of a particular industry, the maximum efficiency of production and distribution is realized through a single supplier.

Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors. This tends to be the case in industries where capital costs predominate, creating economies of scale which are large in relation to the size of the market, and hence high barriers to entry; examples include water services and electricity. It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines), therefore it is unlikely that potential competitor would be willing to make the capital investment needed to even enter the monopolists market.

It may also depend on control of a particular natural resource. Companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimized. If that ideal size is large enough to supply the whole market, then that market is a natural monopoly.

Some free market-oriented economists argue that natural monopolies exist only in theory, and not in practice, or that they exist only as transient states.

Natural monopolies should generally be closely regulated by the government for the best possible performance, but just imagine how awful every other sector of our economy would be if they were similarly under centralized control! Thankfully, most other industries aren't natural monopolies and thrive under competition, not regulation.

California tried deregulating its electrical distribution and generation in the 1990s, but the plan was really only partial deregulation since it set a ceiling on the price producers could charge customers; as you can imagine, the plan led directly to California's power crisis in 2000 - 2001. I believe that some other states have tried deregulation with more success, but there's going to be a limit on how well competition can work for natural monopoly industries in "small" markets.



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