The University of Chicago 11/13/2018 Class 1 Network Industries, Spring, 2014 The Problem of Natural Monopoly and the Duties of the Public Enterprise Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2000-14 Randal C. Picker. All Rights Reserved.

November 13, 2018 Bowden & Offer (1994)

November 13, 2018 Borden (1947)

November 13, 2018 Sears Catalogue, Fall, 1935

Montgomery Ward Catalogue, 1895 November 13, 2018 Montgomery Ward Catalogue, 1895

Montgomery Ward Catalogue, 1895 November 13, 2018 Montgomery Ward Catalogue, 1895

Montgomery Ward Catalogue, 1895 November 13, 2018 Montgomery Ward Catalogue, 1895

Sears Catalogue, Spring, 1926 November 13, 2018 Sears Catalogue, Spring, 1926

Hall, The Ice Industry of the United States (10th Census, 1880) November 13, 2018

Hall: Ice Cutting on the Hudson November 13, 2018

Ice and Refrigeration Blue Book, 1928 November 13, 2018 Ice and Refrigeration Blue Book, 1928

Understanding Public Corporations 11/13/2018 Understanding Public Corporations Key Questions Is it possible to identify a class of enterprises that we should consider to be “public corporations?” What are the essential characteristics of these enterprises? Where should the authority to make this determination lie? November 13, 2018

Understanding Public Corporations 11/13/2018 Understanding Public Corporations Natural Monopoly Issues How should we tell if we have one? Unnecessary duplication of facilities? Universal service? Cross-subsidization? November 13, 2018

14th Amendment Ratified July 9, 1868 Section 1 11/13/2018 14th Amendment Ratified July 9, 1868 Section 1 All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are Citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; November 13, 2018

14th Amendment Ratified July 9, 1868 Section 1 11/13/2018 14th Amendment Ratified July 9, 1868 Section 1 nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny any person within its jurisdiction the equal protection of the laws. November 13, 2018

How is Ice Different from the Cotton Gin? 11/13/2018 How is Ice Different from the Cotton Gin? Frost (U.S., 1929) validated parallel state regulations for cotton gins Demand Side? Importance? Need? November 13, 2018

How is Ice Different from the Cotton Gin? 11/13/2018 How is Ice Different from the Cotton Gin? Production Side? Shared facilities? Bottlenecks? November 13, 2018

Ice Economics Natural Monopoly? 11/13/2018 Ice Economics Natural Monopoly? Is this a business where we can produce at the lowest cost having a single producer? Put differently, is the ice business a natural monopoly? November 13, 2018

Answer As to production As to transportation 11/13/2018 Answer As to production FN 19 suggests not: scale of ice plants has not varied with ownership structure or amount of ice produced As to transportation This may be the key; bulky and expensive to transport, suggests, perhaps, local monopolies, but also note shared delivery system for competing plants (FN 24) November 13, 2018

11/13/2018 Answer As to entrants 1/3 are existing public utilities (electricity, gas and water) (FN 18) November 13, 2018

Evolution of Convenience and Necessity Statutes 11/13/2018 Evolution of Convenience and Necessity Statutes Three Groups Businesses requiring a special privilege First railroads, then street railways then other public utilities Businesses conducted on public property Common carriers using public highways Businesses conducted on private property First cotton gins, and then ice November 13, 2018

Key Qs How should we understand these groups analytically? 11/13/2018 Key Qs How should we understand these groups analytically? What are the legal categories that explain these results? November 13, 2018

11/13/2018 Possibilities Need for Eminent Domain => Unavoidable Role of State re Entry Think of CCN as setting standard for choice to exercise eminent domain Works perhaps for railroads, but not for motor common carriers November 13, 2018

Possibilities Use of public property => right to restrict use? 11/13/2018 Possibilities Use of public property => right to restrict use? Based on what? Neutral rules regarding use different from flat-out entry limits Importance to state? “Cotton is the chief industry of the state of Oklahoma” November 13, 2018

Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26) 11/13/2018 Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26) Monopoly + Public Consequences = Public Business Whenever any business, by reason of its nature, extent, or the existence of a virtual monopoly therein, is such that the public must use the same, or its services, or the consideration by it given or taken or offered, or the commodities bought or sold therein are offered or taken by purchase or sale . . . as to make it of public consequence, November 13, 2018

Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26) 11/13/2018 Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26) or to affect the community at large as to supply, demand or price or rate thereof . . . said business is a public business, and subject to be controlled by the State, by the Corporation Commission or by an action in any district court of the State, as to all of its practices, prices, rates and charges. November 13, 2018

Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26) 11/13/2018 Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26) And it is hereby declared to be the duty of any person, firm or corporation engaged in any public business to render its services and offer its commodities, or either, upon reasonable terms without discrimination and adequately to the needs of the public, considering the facilities of said business. November 13, 2018

1925 Ice Act: Certificate of Convenience and Necessity 11/13/2018 1925 Ice Act: Certificate of Convenience and Necessity Necessity/Preexisting Sufficiency Standard Setting Mandatory Service Obligation Grandfathering November 13, 2018

1925 Ice Act: Certificate of Convenience and Necessity 11/13/2018 1925 Ice Act: Certificate of Convenience and Necessity Necessity/Preexisting Sufficiency That the Corporation Commission shall not issue license to any persons, firm or corporation for the manufacture, sale and distribution of ice, or either of them, within this State, except upon a hearing had by said Commission at which said hearing, competent testimony and proof shall be presented showing the necessity for the manufacture, sale or distribution of ice, or either of them, at the point, community or place desired. November 13, 2018

1925 Ice Act: Certificate of Convenience and Necessity 11/13/2018 1925 Ice Act: Certificate of Convenience and Necessity Necessity/Preexisting Sufficiency If the facts proved at said hearing disclose that the facilities for the manufacture, sale and distribution of ice by some person, firm or corporation already licensed by said Commission at said point, community or place, are sufficient to meet the public needs therein, the said Corporation Commission may refuse and deny the applicant (application) for said license. November 13, 2018

1925 Ice Act: Certificate of Convenience and Necessity 11/13/2018 1925 Ice Act: Certificate of Convenience and Necessity Standard Setting In addition to said authority, the said Commission shall have the right to take into consideration the responsibility, reliability, qualifications and capacity of the person, firm or corporation applying for said license and of the person, firm or corporation already licensed in said place or community, November 13, 2018

1925 Ice Act: Certificate of Convenience and Necessity 11/13/2018 1925 Ice Act: Certificate of Convenience and Necessity Mandatory Service Obligation as to afford all reasonable facilities, conveniences and services to the public and shall have the power and authority to require such facilities and services to be afforded the public; November 13, 2018

1925 Ice Act: Certificate of Convenience and Necessity 11/13/2018 1925 Ice Act: Certificate of Convenience and Necessity Grandfathering provided, that nothing herein shall operate to prevent the licensing of any person, firm or corporation now engaged in the manufacture, sale and distribution of ice, or either of them, in any town, city or community of this State, whose license shall be granted and issued by said Commission upon application of such person, firm or corporation and payment of license fee. November 13, 2018

Understanding the Ice Act 11/13/2018 Understanding the Ice Act 1916 Commission Report CCN would “prevent ruinous competition resulting in the driving out of business of small though competent public service utilities by more powerful corporations” So protecting small incumbents against large entrants? November 13, 2018

Understanding the Ice Act 11/13/2018 Understanding the Ice Act CCN as Commitment Device Think of certificates of convenience and necessity as commitment device by state to guarantee initial entrant that it will not face unlimited entry November 13, 2018

Understanding the Ice Act 11/13/2018 Understanding the Ice Act Under what circumstances, will we see entry by someone like Liebmann? Why does that matter? What would “ruinous competition” look like? November 13, 2018