Natural monopoly

Historically, the electric power industry was characterized as being a natural monopoly. Natural monopolies typically occur in industries with veiyi large fixed capital costs and relatively low operating costs. The cost characteristics of these industries tend to make them the most efficient producers in a given regional market. However, since these natural monopolies face no competition, they have the ability, if left unchecked, to charge prices that could be considerably above costs. Industries with large infrastructure requirements, such as telecommunications, water... 

United States in 1998) from coal (56%), nuclear (20%), natural gas (11%), hydro (8%), oil (3%), biomass (1.5%), geothermal (0.2%), wind (0.1%), and solar (0.02%). Recently, wholesale and some retail markets have been unbundled, allowing competitors to sell electrons with the monopoly utility or municipality providing the transmission service. Open-access restructuring gives customers choices and creates a commodity market in which the lowest-cost electricity wins market share at the expense of higher-cost alternatives. 

At present Russia is the only natural gas supplier to Georgia. This onesided dependency is de facto a monopoly situation that may impose political... 

Key words EU gas directive, Norwegian natural gas transportation systems, economic and legislative regulation, natural monopoly, tariff regulation, security of supply... 

This paper examines some of the major events and regulatory issues that have been introduced and implemented by this industry during recent years. It starts out with a review of the main provisions of the EU Gas Directive followed by a section describing the implementation of these requirements in Norwegian statutory instruments. Finally, the paper outlines some basic state-of-art economic theories applicable for regulating natural monopolies and... 

The second issue discussed is the extent to which we can argue that the transportation network is in fact a natural monopoly. Having concluded it is, the third issue assessed is how the actual regulatory transition has adopted the basic principles of regulating a natural monopoly. The latter question is twofold how do access rules align with recognized principles, and how efficiently does the tariff system work if compared with predefined economic efficiency criteria ... 

In this section we will discuss some technical issues and relate these to economic considerations in order to illustrate that pipeline transportation of natural gas is recognized as a natural monopoly. The core expression of gas flow in a pipeline can be expressed as follows (Weymouth s equation) 36... 

The above discussion indicates that over a wide range, and due to the pipeline investment cost, the average cost of transporting gas decreases. This is a necessary condition for a natural monopoly. 

However, the integrated system and the single operator arguments presented in this sub-section take the basic idea of natural monopoly from a single pipeline level to the network level. Although the economics of scale may be exempt on the pipeline level, there are economics of scale and scope at the network level that make the network a natural monopoly. This simply means that the total cost is least when the network is operated as a single, integrated unit. 

Prior to recapping the basic principles of regulating a natural monopoly, an illustration can be presented, discussing two important questions. These questions focus on how to approach a given market first, is competition feasible and then is competition desirable If we limit ourselves to answer these two questions by either yes or no, we can display the outcome in a matrix as shown below in Figure 3. 

If competition was to be introduced in a natural monopoly, the transportation system owner may create technical or economic barriers to entry for potential competitors. If a competitor attempts to enter the existing market by constructing a new pipeline, the incumbent transportation system owner will have the option of increasing the throughput and reducing the tariff until it eliminates potential willingness to construct a new competing pipeline, provided there is excess capacity in the system. 

A main question thus remains how shall we obtain more competition and market liberalization in a market characterized as a natural monopoly The core notion and answer to the questions is illustrated in Figure 4 below. 

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