Monopoly Of The Chinese Power Industry, Competition And Deregulation

The control of natural monopoly behavior is a problem that has attracted the attention of economists, political scientists, and government officials for many years. Economies of scale and scope, and the economies associated with vertical integration mean that unit costs decline throughout the relevant range of production as output increases. Such economies preclude competition, according to the conventional view, because a single firm could supply the entire service area at lower cost than two or more firms. Given its cost structure, an established utility could undercut its rivals and drive them out of the market. In the absence of regulation, charge the profit-maximizing monopoly price. The behavior will result in a misallocation of resources and a reduction in social welfare relative to the competitive ideal. The traditional solution to the natural monopoly problem is to impose some form of regulation, including government franchising and regulation or, alternatively, state ownership. But in the recent twenty years, the traditional natural monopoly-regulation theory is challenged seriously by the following questions: (1)how to identify natural monopoly? Baumol defines natural monopoly by the property that the cost fuction be strictly globally subadditive,which enlarges the range of natural monopoly. It also means different forms of regulation to be imposed on according to different degree of monopoly. (2) if one sector of a industry is normally a natural monopoly , so is the whole industy ? Electricity sector is a network utility which requires a fixed network to deliver its service. The network is durable, capital-intensive, which serves mass markets and provides essential services. These lead the whole industry to be treated as a natural monopoly. For nearly a century, the electricity sector in all countries has been thought of as a "natural" monopoly industry, where efficient production requires reliance on public or private monopoly suppliers subject to government regulation of price, entry, investment, service quality and other aspects of firm behavior. But the theory analysis presents that although the network of electricity itself is normally a natural monopoly, many of the other services provided over the network are not. Electricity generation requires access to the network of high tension transmission and low tension distribution to deliver electricity to final customers, but the minimum economic scale of generation is small compared to the total demand in most developed countries. Generation can be under separate ownership from transmission and distribution, with competitive entry allowed into generation, and competition between generators. That was the intention behind the restructure of Britain electricity supply industry. In the case, the network remains a natural monopoly ( in any given area), but there can be multiple competing service providers none of whom owns the network. (3)If the vertical integration offers additional efficiency gains from coordination and economics of scale, does that justify the traditional regulation? The answer relies on whether regulation is efficient. If the regulation is inefficient because of excluded competition absolutely, then replacing regulation or state ownership with market competition in electric power generation is justified. So the prior question is whether regulation (including public ownership) is efficient, making reform and restructuring moot. Ideas have consequences. Interest in competitive electricity markets has been stimulated by recent experiences in the United Kingdom and Brazil with privatization, with deregulation in the United States, and with partial reform in Norway. While the Thatcher government policy offers lessons about the process of privatizing a state monopoly enterprise, the American experience becomes relevant to our understanding of how increasingly competitive markets for electricity actually work.Structural and regulation reform of the electricity sectors in many countries is following the basic model previou...