Out of Sight, Out of Mind
Charles Bayless recently retired as President and Provost of the West Virginia University Institute of Technology. Previously he was Chairman, President, and Chief Executive Officer of Illinova Corporation and its wholly owned subsidiary, Illinois Power Company. Prior to joining Illinova Corporation, he was Chairman, President, and Chief Executive Officer of Tucson Electric Power Company.
In 1992, I authored a paper in Public Utilities Fortnightly entitled "Natural Monopolies Accepting the Truth." It argued the economic factors underpinning our industry had so fundamentally changed that the entire generation segment should be deregulated. I was wrong. There are too many externalities for total deregulation.
Externalities were first identified by Arthur Pigou in his work "The Economics of Welfare." An externality is a cost or benefit resulting from a transaction. But the cost or benefit is incurred by a third party who is not a party to the transaction. And for such cost or benefit, no market exists.
An example of an externality is where company A produces a chemical and sells it to company B. In the process A discharges a byproduct chemical into a river, harming the people downstream who were not parties to the sale.
As no market exists for this pollution, the market cannot work. The downstream people have no way to stop the discharge except through political action and regulation.
Let the market handle it, is not an option where externalities are involved. By definition, there is no market.