Peaking Network Effects

The third generation of networks started around the 1920s, as utilities grew to control whole regions across the US, usually through intricate holding structures.8 The drivers were to improve the load factor and to improve the generation mix. On one hand, technology enabled massive generation plants, both hydroelectric plants and carbon plants. Such plants created large economies of scale, but also required large pools of consumers that were beyond the reach of small utilities. On the other hand, it was necessary to balance the various generation plants, as hydroelectric plants might not be available during droughts, to ensure a constant supply at any time. The right complementarity in assets had to be identified to fully exhaust network effects.

Such large systems always required a system coordinator, an entity determining which plants would provide electricity at any given time, ensuring supply in peak periods, and the availability of back-up plants when other plants had to stop production for any reason. This role was played by an obscure alliance of interests around the holdings. Typically, in most countries, and in Europe across the countries, the industry coordinated itself (selfregulation). The role of the coordinator of the system was always at the center of the debate.

Electricity operators were nationalized in most countries, and some were merged into a single national monopoly that was then appointed to run the whole system. France is a paradigmatic case. The state-owned company Electricité de France (EDF) designed the generation mix, including large production plants such as nuclear power plants, built and operated the plants, was in charge of the long-distance transmission of electricity, and then the distribution to consumers. The public monopoly was in charge of coordinating the system.

In short, before deregulation, electricity was provided by regional and national vertically integrated monopolies that all benefited from network effects and economies of scale. Their limitation in size was not dictated by economics, but by politics, namely state boundaries. Most of these monopolies were publicly owned. They coordinated the balancing of supply and demand inside the vertically integrated company and then among themselves, factoring in big reserves.

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