Monopoly Redux

Apropos my last post, the Ste. Genevieve Herald reports:

Under Missouri law, customers must purchase electric power from the utility that owns the service territory in which the customer is located. The Holcim cement plant site lies in CEC’s [Citizens Electric Corporation] certificated service territory. However, Holcim wants to buy its power from nearby AmerenUE (a portion of the plant site lies in Ameren’s territorial boundary) because the cement company says there would be very significant cost savings due to Ameren’s considerably lower rates.

This is an example of one of the many ways in which the regulation of natural monopolies can create undesirable outcomes. Allowing Holcim to purchase its power from AmerenUE would increase competition in the energy market and thus put pressure on CEC to find ways to cut costs. In a normal functioning market, this is exactly what would occur. However, the state government has granted CEC an exclusive right to sell electricity within it’s geographic area — exactly the opposite of what would be beneficial for consumers. Do you smell perverse incentives? I do.

CEC defends itself, claiming that:

[…] the electric cooperative has the exclusive right to sell power to customers in its certificated service territory, adding that the contract signed by Holcim in 2002 binds the cement manufacturing firm, and that allowing Holcim to purchase power from someone else will jeopardize the utility and raise costs for other customers.

Part of the problem is that CEC is never jeopardized. In a market, firms must be efficient and innovate or cease to exist. CEC doesn’t have that problem, and thus can get away with inefficient operations and high prices. A consequence of the exclusive territorial right granted to CEC (and other utility companies in Missouri) is that the loss of one customer raises prices for other customers — but this is the symptom, not the disease. Treating the disease will almost always do a better job of solving the problem than treating the symptoms. In this context curing the disease entails removing state-enforced territorial monopolies and allowing competition at least the chance to break down natural barriers to entry.