Monopoly, Competition, and the Fear of Failure

Lynne Kiesling

Yesterday David Zetland had a post on how bad a job his water utility does of pricing water to optimize use in the face of drought. I recommend it to you, because water is even more abominably, inefficiently priced than electricity … and that’s saying something!

… I don’t care about $5/month surcharges. EBMUD’s “penalty” pricing is not incentivizing me, and I will continue to use as much water as I want. …

Why are accounting details driving water use quotas?!? It seems that EBMUD is more interested in a billing cycle than a sensible communication on water use.

Further, EBMUD has NO IDEA of how many people are in this house (a per capita allocation) and NO IDEA of our water habits. EBMUD just looked at historic use at this meter and knocked 20 percent off that use.

I am NOT a meter! I am a human, and humans need to have water budgets and charges posed to them in HUMAN terms.

Amen, brother! His bottom line resonates with something I’ve been thinking about for a long time:

Water utilities can fail at execution because they are monopolies, and the penalty for failure is just rationing.

YES. The way David put this echoes something I saw earlier today in my reading, but can’t pinpoint. It’s a really, really important point: fear of failure motivates private firms to adapt, to change their strategy. Regulated monopolies cannot fail, and the processes preventing them from failure are all political.  The absence of that fear of failure leads to the dynamism double death-knell of complacency and caution. One of the objectives of performance-based ratemaking, at least in electricity, is to engender in the regulated some semblance of this penalty for failure. But it’s a constructed, and constructivist, concept of success and failure, befitting a regulatory system created by engineers and lawyers. The fear of failure that motivates private actors in markets is more organic, arising from the potential of being innovated around and made obsolete in an open-ended, dynamic, competitive system. Using regulatory institutions to try to inject some of that organicness is nigh-on impossible, which is yet another reason why regulation cannot ever “substitute for the market”.


One thought on “Monopoly, Competition, and the Fear of Failure

  1. I read this post a few days ago and there’s something I couldn’t quite think through that’s still on my mind… is there a better alternative for water than regulated monopoly? I’m assuming water is best provided by a natural monopoly. Wouldn’t a private, unregulated monopoly do just as bad?

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