The St. Louis Post-Dispatch editorial board wrote a piece yesterday about a number of bills in the legislature that would allow utility companies to request rate hikes every six months, as opposed to the current policy that limits a change to every 11 months. The Public Service Commission regulates the rates of investor-owned utilities, like Ameren electric and Laclede gas.

From the article:

Under the proposed new law, rate hike cases could last no more than six months, meaning utilities could file two requests each year.

That’s not just two rate hike cases for each electric company, including AmerenUE. It also means extra rate cases for water companies, including Missouri American Water, which is seeking a 21 percent rate hike, and for gas companies, including Laclede Gas, which has a $52.6 million rate hike request before utility regulators.

Last year, when AmerenUE raised its rates by 8 percent after a 12.1-percent increase the previous year, the utility’s president justified it in order to continue “maintaining reliable electric service.” He also said:

“Much of the increase covers the costs of projects initiated to improve the reliability of our electric system, the costs of environmental and efficiency improvements at our generating plants, and the costs of fuel for those plants.”

It is hard to evaluate the validity of these claims without a field of competitors providing greater incentives for efficiency and cost reduction. That competition doesn’t exist, though, because utilities are generally viewed as a natural monopoly, an industry that requires economies of scale so large that it is most efficient to have a single supplier. As a result, municipalities generally restrict entry into utility markets. In The Concise Encyclopedia of Economics, economist David Henderson pointed out that this restriction is probably unnecessary:

Economists tend to oppose regulating entry. The reason is as follows: If the industry really is a natural monopoly, then preventing new competitors from entering is unnecessary because no competitor would want to enter anyway. If, on the other hand, the industry is not a natural monopoly, then preventing competition is undesirable. Either way, preventing entry does not make sense.

In “The Myth of the Natural Monopoly,” Loyola University economics professor Thomas J. DiLorenzo cited economist Walter J. Primeaux’s findings from more than 20 years of studying electrical utilities and competition:

• Contrary to natural monopoly theory, costs are actually lower where there are two firms operating;
• Contrary to natural monopoly theory, there is no more excess capacity under competition than under monopoly in the electric utility industry;
• The theory of natural monopoly fails on every count: competition exists, price wars are not “serious,” there is better consumer service and lower prices with competition, competition persists for very long periods of time, and consumers themselves prefer competition to regulated monopoly;

If a utility is providing the lowest price, a competitor’s challenge will not be a serious threat. Competition itself — or the potential for competition — can keep prices low. Regulatory boards, on the other hand, historically have not been successful in lowering prices, as DiLorenzo noted:

In one of the first statistical studies of the effects of rate regulation in the electric utilities industry, published in 1962, George Stigler and Claire Friedland found no significant differences in prices and profits of utilities with and without regulatory commissions from 1917 to 1932. Early rate regulators did not benefit the consumer, but were rather “captured” by the industry, as happened in so many other industries, from trucking to airlines to cable television.

If barriers to entry are low enough, the potential for competition can increase efficiency and cost reduction in existing utilities. Instead of a focus on how often a utility company can change its rates, Missouri residents would benefit more from lowered regulatory barriers to entry in utility markets. In that case, future rate increases — like the recent decision to increase rates by 3 percent in order to promote energy efficiency — will be weighed against the possibility of a competitor attracting market share through lower prices.