What Difference Does it Make?
Basically, the word monopoly has a negative connotation; hence, recognizing its natural occurrence in the utility industry may seem like a less reliable system to bank on.
Economists have explained that allowing a single corporate entity to monopolize the operations of certain utilities takes away the impracticability of replicating cost-intensive infrastructures and other capital investments.
In return, profits, albeit controlled, will go to the lone provider as this will enable the entity to recover or compensate the cost of money, within the shortest time possible. This will also enable the natural monopolist to provide electricity more efficiently, as fund availability and expenses eventually meet at similar levels.
To better explain this, let’s illustrate by way of example.
Supposing Company A, B and C are all engaged in the business of providing electrical power. It follows that each of these companies would be constrained to install their own power lines, transformers, transmissions, power plant sites and other basic facilities as a means to generate and distribute power to different consumers.
For illustration purposes, let us further suppose that each company had the capacity to spend as much as $20 million to erect, install and render as operational the infrastructures. Naturally, all three companies expect to recover the $20 million costs within the shortest time possible. Still, their selling prices have to be competitive in order to allow all companies to operate fairly by competing in terms of services instead of prices. At the end of the day, all three companies will find it difficult to meet the costs of running and operating the facilities since the expected cash increment has not materialized.
Let's take the example further by hypothetically taking into consideration a certain community, in which there are about 6,000 households being served. Supposing the rendering of power distribution services were equally divided between the three business entities, this denotes that there is no more room for projecting additional customers. Not unless, however, some of the customers transfer their business to any of the two other companies, which will, of course, be detrimental to the replaced entity.
In addition, it cannot be expected that all of the 6,000 households have the same amount of power consumption. Thus, it is possible that one of the companies is serving more customers but selling less in terms of power distribution. Similarly, another company may be selling more but not all of their customers are in the habit of paying their bills on time.
These circumstances are beyond each company’s control and could likewise render the entity helpless in leveraging prices. Increased prices would result in losing customer patronage, while lowered prices will only drive-down both cash increments and profits. Hence, multiple operators providing utility services in a single community are deemed impractical.
Basing on these circumstances, it became a common contention that a natural monopoly was a necessary evil.