Chapter 7: Traditional Economic Regulation

Economic regulation - traditionally exemplified by that now-defunct industry regulatory bady, the Interstate Commerce Commission - was considered virtually the entire field of regulation 30 or 40 years ago. This form of regulation, which still exists, is characterized by the use of independent, politically balanced agencies organized more or less along industry lines. The most widespread use of economic regulation is at the state level, where public utility commissions continue to hold jurisdiction over electric, gas, and telephone utility companies.
The end results, the maximum allowable rates to be charged, are fundamentally based in two key objecitives:

• To protect consumers against exorbitant charges that might otherwise result from the monopoly aspect of public utility franchises.
• To set rates for service at levels that will afford the companies an opportunity to earn a fair and reasonable rate of return.

The movement to regulate electric power resulted from two basic factors.

• Consolidation in the early 1900s of competing utilities often rpoduced price fixing
• Most students of the subject assumed that utilities are natural monopolies and that attempts to introduce competition would increase unit costs by forcing duplicaiton of costly transmission and distribution networks.

The principal solution to these problems, which evolved over a considerable number of years, is to permit franchised monopolies to operate under government rule makeing. Regulation is designed to serve as a substitiute for competition.

Improvements in the technology of transmission have made spatial location of power generation less important. The utilities' monopoly on power generation has been broken by several thousand small power plants that have been built as a result of the Public Utility Regulatory Policies Act of 1978.

Some energy experts have gleaned some lessons for the future from the Californian experience:

• Replacing regulation with a well-functioning competitive market is not easy.
• Consumers cannot be insulated from changes in wholesale prices
• The real benefits of electricity deregulation come from encouraging new investments in more efficient power plants.

Economists' suspicion of efforts by business to restrain trade dates back at least to Adam Smith's oftenquoted statement, "People of the same trade seldom meet together, even for merriment and dicersion, but the conversation ends in the conspiracy against the public, or in some contrivance to raise prices."
Two conflicting viewpoints dominate economic theorizing on antitrust. One clainms that the only legitimate gola of antitrust is consumer welfare, which is equivalent to economic efficiency. An alternative view is the competitive approach. Its proponents believe that the intent of the sherman act is to establish the right for buyers to pay no more than the competitive price. This group notes a part of Adam Smith's wealth of nations that is rarely quoted: "It is impossible indeed to prevent such meeting, by any law which either could be executed, or would be consistenet with liberty and justic." On the other hand, those who take a structural view of the antitrust process believe that there laws should be used to reorganize the economy.
The reach of government antitrust agencies is being undercut by three key factors: the internationalization of production; the increased cross-border flows of information, money, and technology; and the resultant rise of the transnational enterprise.
The influence of fedal economic regulatory agencies on the transportation, banking, and communications industries has greatly declined in the past decade. Antitrust regulation has also changed significantly during recent decades. The criteria for judging harmful levels of industry concentration have been altered.

Source: Business and Government in the Global marketplace (7 edition Murray L. Weidenbaum)