Technology Collapsing Monopolies

Commentary, Frontier Centre, Information Technology, Uncategorized

The inevitable, steady movement towards competition in utility markets took on new meaning in Britain this fall. New technology now allows telephone calls to be made over electric lines.

This breakthrough adds momentum to the "convergence" phenomenon, whereby monopolies that previously required separate companies to provide power, cable TV, and telephones are disintegrating. In the not-too-distant future, none of these services will have captive markets.

A Canadian company, Northern Telecom, had a direct hand in demonstrating this innovation. Together with a British partner, United Utilities, they tested the technology for a year in about a dozen households. They discovered a way to transmit data over regular electric lines. The two signals do not interfere with each other because they travel at different frequencies.

Convergence driven by technological improvement has diminished monopolies in two important ways. It is now cheaper to produce electricity in small, natural gas-fired turbines than in the mega-project style that brought us huge hydroelectric dams, nuclear power, and giant coal-burning plants. Fibre-optic cables already allow a full range of telecom and cable TV services to travel over one cable.

These advances, combined with the new electric telephony, point to a radical restructuring. The traditional, regulated utilities will become regular businesses with a wide-open, competitive framework. Don't like the way the Telephone Company is treating you? Call Hydro. Getting the run around from the Cable Company? Call the Telephone Company.

The chief of technology at the company that controls electric transmission lines in England and Wales welcomed the news. "At long last," he told The Wall Street Journal, "the local monopoly of the incumbent telecom operators is about to be demolished."

It is entirely appropriate Britain was the setting for this latest innovation, because it pioneered competition in electric markets, with startling results. The £37-billion-a-year industry was privatized and deregulated in 1990. Previously, a single producer, the Central Electricity Generating Board (CEGB), controlled power production and transmission. Twelve regional companies that bought their power from the CEGB monopolized local distribution.

In an interview last spring, Britain's then-Energy Minister described what his government faced when it tackled the issue: "When we first presented our proposals for change, we faced huge opposition from a variety of vested interests. We were told that real competition was impossible, that prices would rise, that the physical safety of the workers would be imperiled in the search for profits, and that the security of supply would be threatened. In fact, prices have fallen, the safety record has improved, and service has improved. The whole industry is driven now by the needs of the customer and not by the wishes of the producer."

The distribution system could not be broken up because it would be too expensive to duplicate. Therefore, the wires remained a regulated monopoly. Everything else was sold and deregulated.[PH1]

Twenty generating companies now sell power in Britain. The generation, supply and distribution of electricity were divided into three separate activities and sold off in pieces. Since then, the industry has become enormously more efficient. According to official estimates, the price of electricity has dropped 11 per cent for residential customers and 14 – 24 per cent for industrial customers. Others rate the overall price decline at 15 per cent.

The industry initially thought it would be unable to achieve the performance improvements the government wanted. However, as the former Energy Minister now relates, the performance level the electricity sector was unable to reach as a monopoly "became laughingly easy to achieve once competition was introduced."

Falling prices and increased productivity are now possible across the whole gamut of electricity industries. Full deregulation in electricity markets starts in the United States at the end of 1997.

Alberta is the first province to fully open up its electric markets.

Meanwhile, a homegrown company is breaking new ground in Britain.