Chapter 12: Monopoly or Competition

CHAPTER 12 Monopoly or Competition The advocates of government ownership and operation of the means of production generally place the power industry at the top of their list. They offer various reasons for this. First, it is claimed that the power industry is "clothed with the public interest." True. But so is the baking industry and the shoe industry. In fact, it would be difficult to find any industry that is not "clothed with the public interest." The second — and most effective — weapon being used to socialize the electrical industry is the idea that the production of electrical energy is a "natural monopoly." Let us begin the examination of this idea by trying to identify the factors that are generally thought to constitute a monopoly. Did the old village blacksmith have a monopoly? It is a fact that his was often the only shop for miles around. But his apparent monopoly was always limited by the freedom of others to compete with him. If his price got too high, one or all of several things happened. A rival shop opened across the street. Or the farmers shod their own horses. Or they took their business to a nearby town. Thus exclusive physical possession of a site or a service does not in itself destroy competition. This holds true as long as competition — actual or possible — is not legally forbidden by government or criminally suppressed by the strong-arm methods of a 80 MONOPOLY OR COMPETITION rival company. Government itself holds the final responsibility for both of these disastrous possibilities.

Now is there something about electricity that automatically frees it from the primary competitive factors that control other industries? The advocates of government power production say yes. So let us examine some of their arguments. First comes the assumption that all electric companies have exclusive franchises. That is not true. Few, if any, of them have exclusive or perpetual franchises. This situation was attested to in a rather dramatic manner when fourteen private power companies sued TVA.The power companies, in effect, claimed that direct competition was illegal and contrary to the charters and local franchises that the various states and communities had granted to the private companies. The Supreme Court ruled: ". . . neither their charters nor their local franchises involve the grant of a monopoly or render competition illegal. The franchise to exist as a corporation, and to function as a public utility, in the absence of a specific charter contract on the subject, creates no right to be free of competition, and affords the corporation no legal cause of complaint by reason of the state's subsequently authorizing another to enter and operate in the same field."51 Thus, because of the TVA threat to use the taxpayers' money to build competing lines — and to sell subsidized electricity at lower rates — the private companies were forced to sell out at terms suitable to TVA.

Prior to TVA, the electric companies in the Tennessee Valley were not automatically and forever free from direct competition among themselves and from outsiders. They had no exclusive or perpetual franchises. Then the federal government moved in with its discriminatory rates; its subsidized program; its threats and promises. That meant the end of the possibility of regulation by NO EXCLUSIVE FRANCHISES; STATE MONOPOLY 81 direct competition because, short of a revolution, the state and local governments cannot very well throw the federal government out. Thus a single seller has taken over an entire region. It is called "TVA: the decentralized administration of centralized authority." And the degree of monopoly is far greater than ever before! All private electric companies now get from state and local governments the right to exist and to do business. They also secure specific permission from government to use the streets and highways to deliver their product to their customers. Usually they have the right of eminent domain. In these respects they do not differ from many other types of business.

Every corporation must secure a charter or franchise from government before it can exist and do business. This alone can hardly make any corporation a monopoly. Most companies and persons who use the streets and highways to serve their customers must, in one form or another, receive permission from government to do so. The monopoly feature in this procedure is government's power to deny permission to a competitor to use the streets. Unfortunately, government has generally chosen to exercise this power in the electrical energy field. Thus the accusation of monopoly should be directed against the agency that refuses to permit a competitor to enter the field. Government, and not private enterprise, is the culprit. And as for eminent domain, that right is also given to many other types of business. They include railroads, ferries, universities, housing projects, parks, mines, hospitals and a host of others.

It is true that usually only one power company serves a given area or community. But this is not always the case. And even when there is only one power company, the extent of actual and potential competition is far greater than appears on the surface. First of all, according to Federal Power Commission data, in 1944 there were over 100 cities with populations of more than 2,500 82 MONOPOLY OR COMPETITION where two or more power producers were in a position to compete directly. Seattle, Washington is probably the best example of this. There, two power producers directly compete throughout the city. In most of the other cases the direct competition usually occurs in a smaller area or on a smaller scale. Then there are certain forms of direct competition that all power companies must meet. For instance, manufacturing plants, apartment houses, stores, hotels, farms and many other types of business can and frequently do install and operate their own electric generating equipment. For instance: "Of the 143.2 billion kilowatt-hours generated and purchased by manufacturing and extracting establishments in 1945, . . . 31.1 per cent . . .

came from [their own] generating plants."52 And there is nothing to prevent them from generating all their electricity. They would do just that if it were not for the fact that power companies generally sell electricity at such low rates. In addition, all power companies — including TVA — must meet direct competition from substitute forms of heat and energy. For instance, electricity, gas, oil, coal, wood, bottled gas and waste steam are competing ways of cooking, heating water, and heating houses and plants. Electricity, gas and oil are alternate methods for refrigeration and air conditioning. Steam, gas and Diesel engines under many circumstances are alternates for electric power. And, finally, there remains the most effective competition of all. The electric companies must compete with everyone else for the consumer's dollar. If the price of electricity is low enough, the consumer may, for instance, buy that new electric stove, electric blanket, or electric clock. But if he considers the price of electricity too high, he will buy something else with his money. The electric companies know that, within obvious limits, they can make more profits by offering lower and lower prices. And they have been LOWER RATES OFTEN BRING HIGHER PROFITS 83 following that principle from the day that the first generating plant was built in America.

That is one of the main reasons why the average revenue per kilowatt hour of residential electricity has dropped from eleven cents in 1906 to about three cents in 1947.53 Since 1939, according to the United States Bureau of Labor Statistics, electricity and commercial gas are the only consumer items which have gone down in price. Government power commissions in approving rate reductions for electricity have merely followed market trends. That is, they have approved and decreed what the power companies would have done voluntarily to increase revenues and profits if left alone. If, as is frequently claimed, government control is responsible for this decline in rates for electricity, why did not the same sort of government control reduce rates in the railroad and other transportation industries? If government can protect the consumers against rising costs, why has the cost of all government services been rising? The truth is that government regulation is only one factor in determining costs and prices, and over a period of time it is an open question as to whether government regulation does not do more to maintain and raise rates than to lower them.

If any private company produces a desired product or service at a price the consumer is willing to pay, there is no reason why it shouldn't prosper and make a profit. Most private electric companies meet this test. But if any company can't meet this test, it should fail. If the present limited competition among private power companies were made complete by throwing the field open to all comers, private enterprise itself would supply the yardstick for measuring efficiency of operation and fairness of rates in any locality and for any consumer. This decision of monopoly or competition rests squarely with government. The only reason why there is not 84 MONOPOLY OR COMPETITION more direct competition throughout this nation is because government has decided that one power company under government regulation gives better service and lower prices than would competing companies. That decision by government is subject to serious questioning. For instance, why should a competing company move in unless it could offer a better service at a lower rate? Would that not be to the advantage of the consumer? It is true that the least efficient of the two competing companies might go out of business. That would be of small importance if the consumer thereby got a superior product. Thus, again, it is government that creates the monopoly features of private power companies, not the companies themselves.

TVA represents a step backward instead of forward. It means reduced competition as one giant arm of the state replaces many private companies. It means that an agency of government, with an exclusive and perpetual franchise, replaces voluntary associations with non-exclusive and limited franchises. It means that instead of private companies conforming to competitive markets and economic trends, there is an agency that sets its own course, fixes its own rates, and makes up its losses by compulsory levies on the taxpayers. Only government can stop competition in the electric utility field. It is government alone that can grant and lawfully enforce special and exclusive privileges for any producer in any field. Surely the remedy for the present extent of monopoly and special privileges in the utility field is not more monopoly and special privileges, like TVA, with the charges put into the tax bill instead of the electricity bill! The logical course would seem to be the withdrawal of government protection and special privileges which is responsible for creating the present extent of private monopoly in the first place.

In reply, it is commonly argued that directly competing comINEVITABLE RESULT OF GOVERNMENT CONTROL 85 panies would cause unnecessary inconvenience to the public. There would be traffic interruption while extra cables were put in. The government-owned and privately-owned gas companies in the England of 1880 made much use of this argument to prevent electricity from entering their territories as a competitor. As a result, the newly-formed private electric companies resorted to the tactic of running their lines over the roof tops of the houses. Then the gas companies advanced the "ugliness" argument. This vested interest opposition — resulting in the stringent regulations contained in the Electric Lighting Act passed by Parliament in 1882 — almost killed the new industry in England. "At the close of 1888, there were in operation in the United Kingdom twelve central electric stations. . . ."54 At the same time in the United States because of direct competition and practically no government regulation, "there were ... a grand total of 574 central electric stations in operation at the close of 1888."55 And this superior development occurred despite the fact of abundant capital and technical knowledge in England.

In 1888, the English Parliament relaxed some of its rigid controls over the new industry. But the remaining controls by government were still rigid enough to keep the electrical industry in England far behind that of the United States, which had direct competition and few government regulations. This was the period when the United States became the industrial leader of the world. The inconvenience of traffic interruptions, and the ugliness of two sets of electric light poles, were a small price to pay for this progress with its resulting rise in real wages and levels of living. Maybe Karl Marx was correct in assuming that socialism must necessarily be deferred until competitive capitalism has built up a flourishing industry. Otherwise there would be little to socialize.