Utility Markets: Monopoly or Perfect Competition?

The energy utility market has undergone significant changes since its creation in 1932 and has seen an especially turbulent history from the early 1990’s to late 2000’s.  Electric power generators have morphed their business concepts significantly as they respond to various regulatory setbacks, demand fluctuations, price volatility, and new competition.  Examining the C4 and C8 ratios from the US Economic Census from 1992 to 2007 indicates changes in competition, deregulation, consolidation, and divestment within the electrical utility industry.

From 1992 to 1997, there was an increase in the concentration of the energy market by the leading four and eight firms of 4.4% and 3.8%, respectively, following the passage of the Energy Policy Act of 1992 (US Census Bureau, 1997).  This act, when initiated into law the following year, opened the transmission network to non-utility generators and pushed the consolidation of those in place as holding companies with large portfolios entered the industry (Gale, 2012).  With an open market in place and power of regulation in the hands of the state governments, electrical generators were operating under relatively  stringent laws.  Despite the state scrutiny, energy rates increased as utility firms monopolized the markets in which they operated. (Hirsch, 1997)  Outraged consumer protection agencies pushed for the passage of two 1996 acts that allowed states to look at the possibility of de-regulation in utility markets, allowing more entrants into the space to drive energy rates down.

For the first time in the history of the utility industry, customers were allowed to shop for energy rates.  From 1997 to 2002, the largest increase in concentration from the top four and eight largest utility electricity generators was made— a 7% increase with the largest eight firms representing almost half of the total US market (US Census Bureau, 2002).  A competitive market with more entrants and increasing mobility does not necessarily equate to consolidation, so the increase is quite shocking.  The reason for the consolidation of the market during this period is related to the abnormally high competition for energy rates.  Customers could now shop for the most affordable provider through new energy traders and marketers – two new types of firms that hedged rates in hopes of providing more consistency for large users (EIA, 2000).

Finally, the C4 and C8 rates paint a significantly different picture in the years leading up to the 2007 US Economic Census.  With the establishment of the Office of Market Oversight and Investigation (OMOI) in January of 2002, many large utility companies were required to divest in some of their holdings. The OMOI was established to provide more oversight in consolidated industries and was built from the investigation that followed the ENRON scandal (PBS, 2011).  In 1997, concentration ratios of the largest eight firms showed a decrease in almost a third of the size shown in 2002 (US Census Bureau, 2007).

Despite the changes discussed thus far, there are not significant spikes in the concentration ratios of the electrical utility industry.  Several reasons exist for this steady level of concentration. The first rests on the fact that significant barriers to entry exist within the power generation world: high upfront capital costs, regulatory approval, and time to gain trust within the market forcing many new entrants to reconsider.  Another reason for the consistency within the market is due to the vertical structure of power supply and distribution companies.  There are only a handful of these companies in existence due to the reliance on infrastructure and their complicated supply chain cuts profits from generators significantly.  Finally, the competitive rivalry between utility firms as they fight for market share and economies of scale, is another reason for a steady level of concentration.  In order to maintain markets share, some firms diverge assets into other services within a larger energy supply market instead of consolidating (PBS, 2011).

Projections show that in order to meet the energy demands of 2020, the US has to increase production by 40%, an undertaking that the US government cannot ignore.  In the next coming decade, expect to see an increasingly high involvement in the energy sector from the Federal government as they continue to diversify their energy portfolios with renewables.  How will this effect the concentration of the electrical generation industry?  Will the solar and wind industry follow the same path as the conventional electrical generation industry?

• Energy Information Administration. (2000) The Restructuring of the Electric Power Industry: A Capsule of Issues and Events. Washington, D.C. Retrieved from:  http:// www.eia.doe.gov/cneaf/electricity/chg_str/booklet/electbooklet.html
• Gale, R. (2012) Regulation and Administration of Communications, Electric, Gas, and Other Utilities. Farmington Hills, Michigan. Retrieved from: http://business.highbeam .com/industry-reports/finance/regulation-administration-of-communications-electric-gas-other-utilities
• Hirsh, R. (1997) Emergence of Electrical Utilities in America. Smithsonian Institute exhibit: Powering a Generation of Change. Retrieved from http://americanhisto ry.si.edu/csr/powering/.
• Public Broadcasting Service. (2011) Public Vs. Private Power: From FDR to Today. Frontline Magazine. WGBH Educational Foundation. Retrieved from: http://www.pbs.org/ wgbh/pages/frontline/shows/blackout/regulation/timeline.html
• United States Census Bureau. (1992, 1997, 2002 & 2007). Utility/Electrical Generation Subject Series: Concentration Ratios: Share of Value of Shipments Accounts for by the 4, 8, 20, and 50 Largest Companies for Industries: 2007 [Data file]. Retrieved from http://factfinder2.census.gov