![]() It does not prevent differential treatment if this is objectively justified. Nondiscrimination is not an absolute principle. This principle, in particular, applies to connection and access to the network, as well as to access to the commercial infrastructure of the wholesale market. The Federal Electricity Law requires the providers of natural monopoly services on the electricity market to respect the fundamental principle of nondiscrimination. Given this, and the discussions in Chapter 2, could it also be the case that production and subsequent delivery of electricity is not a Natural Monopoly?Īnatole Boute, in Evolution of Global Electricity Markets, 2013 4.3 Nondiscriminatory Treatment by Natural Monopolies As shown, the formerly thought-to-be-a-Natural-Monopoly known as AT&T (and the local operating companies the Baby Bells) was determined not to be a Natural Monopoly (due, at least in part, to faulty econometric analysis), and was subsequently forced to divest its local operating companies, among other business lines. In Chapter 2, “The Sustainability of a (Natural) Monopoly”, there is a lengthy discussion on Natural Monopoly, and additional comments on the sustainability of Natural Monopoly are provided. In other words, the assets required are specific to the production of the output and, as such, not easily sold once production of the particular product ceases. Is the Electric Industry a Natural Monopoly? As discussed in Chapter 2, the obvious answer is “Yes”, at least the transmission and distribution components, due to the presence of the high fixed costs which are largely sunk. In both cases, an increase in average cost may translate into additional profits for the firm, causing regulated firms to engage in unnecessary activities.Monica Greer PhD, in Electricity Cost Modeling Calculations (Second Edition), 2022 9.1 Introduction ![]() Both of these approaches induce some inefficiency of production. There are two strategies for limiting the price: price-cap regulation, which directly imposes a maximum price, and rate of return regulation, which limits the profitability of firms. This is the more common strategy used in the United States. ![]() Alternatively, regulation could be imposed to limit the price to p 2, the lowest break-even price. The product could be subsidized: Subsidies are used with postal and passenger rail services in the United States and historically for many more products in Canada and Europe, including airlines and airplane manufacture. At this price, however, the average total cost exceeds the price, so that a firm with such a regulated price would lose money. We see the need for a subsidy in Figure 15.3 "Natural monopoly" because the price that maximizes the gains from trade is p 1, which sets the demand (marginal value) equal to the marginal cost. An immediate problem with regulation is that the efficient price-that is, the price that maximizes the gains from trade-requires a subsidy from outside the industry. Historically, the United States and other nations have regulated natural monopoly products and supplies such as electricity, telephony, and water service. If the monopoly price is not sustainable, the monopoly may engage in limit pricing, which is jargon for pricing to deter (limit) entry. ![]() The feasibility of entry, in turn, depends on whether the costs of entering are not recoverable (“ sunk”) and how rapidly entry can occur. A monopoly price is not sustainable if it were to lead to entry, thereby undercutting the monopoly. The monopolist would like to price at pm, which maximizes profits.The monopoly price may or may not be sustainable. In this case, the average total cost of a single firm is lower than if two firms were to split the output between them. An example is illustrated in Figure 15.3 "Natural monopoly".
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