Sender: •••@••.••• (Glen Raphael) This is a response to Dave Ketchum and others who are wondering why some consumer advocates want open competition between local service providers of cable, telephone and such. >It is beyond me how competition fits into the local loop. [...] >How do competing companies [...] do all this >more economically than a single company could? Let's see if I can make this easy to understand. If the local utility is a "regulated monopoly" then its rates are usually set by some sort of regulatory agency using "cost-plus" or "reasonable rate of return" as a guideline. That is, figure out what the cost of providing the service is, add in a profit margin of, say, 5%, and that's what this provider is allowed to charge. This is really the only vaguely practical way to do things if you aren't willing to let the market set prices, so it is what we usually do. Okay, now suppose you are a manager at the plant and a new technology or process comes to your attention which might cut costs by $10 per customer per year. If your service were being provided in an unregulated free market, that would be $10 per customer additional revenue. This would add to your bottom line. It would allow you to cut rates to steal business away from your competitors. it would allow you to give yourself and your employees a raise, it would allow you to invest more and increase dividends. In short you WOULD adopt this new technology and your costs would decrease over time because of it. But if your prices are set using cost-plus, there's no reason (from that manager's point of view) to switch. If you cut cost by $10 per year the regulatory agency will probably decrease the price you are allowed to charge by about $10 per year. So why bother? In fact, you are only guaranteed to have a bigger budget next year if you find ways to INCREASE costs! It is due to this incentive problem that competitive local utilities are generally cheaper than regulated monopoly local utilities. The cost of maintaining another network turns out to be trivial compared to the savings that result when almost every employee has a personal incentive to avoid waste and promote efficiency. I believe the term coined by the economists for this effect is "X-efficiency." Anyway, when you compare competitive electric companies or cable companies to monopoly ones you invariably find not just lower *prices* but lower *costs* as well; if the traditional economy-of-scale argument were correct you would find lower per-unit costs in the monopoly situation, but you do not. Therefore, most of what we think of as "natural monopolies" are not. They are artificial monopolies created via regulations designed to keep out competitors. As for cluttering up the street, private suppliers tend to share lines with the existing services, and to underground them wherever practical. Most people have at least two independent networks to the home today and many have three (telephone, electric, cable). In the case of Lubbock, Texas -- which has two competing electricity networks -- one company shares wires and maintenance expenses with the phone company, the other shares with the cable company. And keep in mind that some of the new technologies which are not being used have the effect of *reducing* wiring. For instance, why string cable to a building far outside of town when you can beam info there over radio or via satellite? The current regulatory environment usually makes it illegal for a large apartment complex owner to set up her own mini-cable television network, but that would clearly cut costs over having each resident deal with the city's local monopoly provider and run wires from the central hub. Local service competition will cut costs and improve service. If we want to see access improve and costs come down, we need to fight to deregulate local utilities and allow open competition among them. Glen Raphael -- Glen Raphael, •••@••.••• NewtPaint - the Newton paint program! President, Stanford/Palo Alto Macintosh User's Group (SMUG) <A HREF="http://www.batnet.com/liberty/">Glen's World</A><BR> ~=-=-=-=-=-=-=-=~=-=-=-=-=-=-=-=-=~-~=-=-=-=-=-=-=-=~=-=-=-=-=-=-=-=-=~ Posted by Andrew Oram - •••@••.••• - Moderator: CYBER-RIGHTS (CPSR) Cyber-Rights: http://www.cpsr.org/cpsr/nii/cyber-rights/ ftp://www.cpsr.org/cpsr/nii/cyber-rights/library/ CyberJournal: (WWW or FTP) --> ftp://ftp.iol.ie/users/rkmoore Materials may be reposted in their _entirety_ for non-commercial use. ~=-=-=-=-=-=-=-=~=-=-=-=-=-=-=-=-=~-~=-=-=-=-=-=-=-=~=-=-=-=-=-=-=-=-=~
