The Inefficiency Paradox of Monopolies"Whosoever owns the river bank, owns the fish".Anonymous Russian Proverb

2/25/2014www.provisium.comJim Kayalar

Power utility companies throughout the world are mostly monopolies or

oligopolies. The whole human race is geared to using some form of energy

whether it be in the form of fossil fuels, renewables, nuclear, coal, hydro etc.

Most of these energy sources are piped into our homes in the form of

electricity to feed our power-hungry dependence on technology. We all have

gadgets that let us do complex tasks either to generate outputs,

communicate or just entertain ourselves. The yearly electricity consumption

of a smart phone equals that of a large fridge, a tablet computer consumes

twice that.

Utility companies around the world are enjoying the "mobile" age as per

capita electricity consumption goes up. Electricity prices seem to only go in

one direction. Up. Homeowners around the world are trying to go "off-grid"

by generating their own energy mostly through solar power and save

money. Some countries have systems in place whereby individuals may sell

surplus electricity back to the power companies and even generate an

income. On a sunny day there may be so much surplus energy generated by

individuals and sold back to the power utility company that these may have

to shut down their power generators and take them "off-grid".

On a sunny day the monopoly becomes a monopsony as supply and demand

curves shift. As more customers try to improve energy efficiencies and

ultimately start to generate their own electricity power utilities are left with

an uninspiring position. They own or lease large-scale power

generators/distribution grids. As monopolies their long-term expectations

are a gradual increase in the number of customers and increase in electricity

consumption. Based on this business model they have invested hundreds of

millions or even billions of dollars. But what happens when the number of

customers starts to decline, therefore there are fewer customers to sell to

and not only that but they are forced to buy electricity from the very same

customers that have gone "off-grid"?

They increase prices. They pass on the fixed cost of the business model to

the remaining customers and try to justify this by illustrating that existing

customers must make up for the cash shortfall. The price increases

inevitably motivate more people to lower consumption or go "off-grid".

Chinese manufacturers of solar power systems are actively traveling the

sunny spots of the world and proposing to set up a "zero percent down"

build operate transfer business model to countries, islands, cities and towns.

In return for building a system that would totally replace existing inefficient

monopolies they propose to build solar power systems with certain buy back

and time rights guarantees. A proposal to the American Pacific island of

Saipan would have cut electricity costs from over 55 cents by at least a third

if not more. Did it happen? Of course not. The Saipan government would

have lost tax revenues from the new more efficient project. Governments

need inefficiencies just as power utility companies do.

"Our inputs are higher therefore you must pay more" was the message from

a power utility company in the Philippines. We will pass on our inefficiencies

to you the customers and the government will collect higher taxes from you

as well.

HOW DID WE GET TO THIS? Market forces will inevitably equilibrate the new

energy supply & demand business model. But until then we will have to put

up with our existing realities.

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