Junior Monopoly

According to the Springfield News-Leader:

The Public Service Commission is allowing Laclede Gas Company to charge customers an estimated additional $127 over the November through March winter heating season. Regulators have already approved similarly sized purchase gas adjustments for the Empire District Gas Co., AmerenUE, Atmos Energy and Missouri Gas Energy.

The natural gas industry is an example of a natural monopoly. A natural monopoly faces a unique cost structure, in which high fixed costs that present a significant barrier to entry for competitors combine with low marginal costs that allow the monopolist to set its price significantly higher than it would under competition. The textbook argument for regulating natural monopolies is that if regulators can force the monopoly to set its price equal to the marginal cost of the last unit produced (in this case, of natural gas), society benefits from higher levels of production and lower prices.

The problem is, that is one huge "if." In order for regulators to force natural monopolies to set their prices correctly, they have to know both what the correct price is and be motivated to enact the regulation necessary to correctly set the price. In real life politics, neither assumption seems likely. Only the monopolist has any real idea of what industry costs look like, and regulators almost assuredly have less information — especially given the incentive for the monopolist to inflate and misrepresent costs. In addition, regulators face perverse incentives to collude with the monopolist, as well as to prevent any changes — technological or otherwise — that threaten the need for the regulatory commission to operate, and thus for the regulator’s job to remain intact.

Deregulation is not without faults, but the primary benefit to be taken into account is the innovation it spurs. If any industry has abnormally high profits, such as under a natural monopoly, there is an extremely large incentive for outsiders to break down the high cost barriers to entry and compete with the natural monopolist. Under regulation, the natural monopolist is less likely to face this sort of competition and more likely to entrench itself with a static state of technology. In the long run, Missouri would probably benefit from deregulating various natural monopolies in order to let competition and innovation break them down.