Natural monopolies:the case of Romania’s distribution network

A natural monopoly exists when economies of scale are so substantial that a single firm can produce total business output at a lower unit cost, and thus more efficiently than two or more firms”.

In Romania, a number of industrial sectors that serve the public interest are strictly regulated – natural gas, railroad or electricity systems, to name a few. As such, for the local energy sector, and particularly for electricity, the transmission and distribution services are regulated as “natural monopolies”.

Conceptually, this is explained through reasons of public interest: assuming a context of fragile and inefficient markets, the regulatory body represents society’s interest. 3 In this approach, natural monopolies, as single suppliers, are seen as lowering product costs4. In other words, a company that is alone in a sector can focus its investment on the long term, which will lower the costs, while competition in such a sector would generate wasteful investment.  Simply put, “in some industries, average costs are minimized when production is concentrated within a single firm”.

Academically, natural monopolies are analyzed as excludable but not rival goods. The underlying logic is that without competition only one competitor would survive and thus generate a monopoly over that particular good. Furthermore, the state regulates the existence of natural monopolies in order to prevent private entities from going into limiting supply under the incentive of charging a price that is much higher than its costs. In the particular case where privately owned companies were granted specific licenses to operate a distribution network, this is legally defined as a public franchise: “a right granted to a firm by government that permits the firm to provide a particular good or service and that excludes all others from doing the same”.

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