1. The University of Chicago
11/13/2018
Class 1 Network Industries, Spring, 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
Copyright © Randal C. Picker. All Rights Reserved.

2. November 13, 2018
Bowden & Offer (1994)

3. November 13, 2018
Borden (1947)

4. November 13, 2018
Sears Catalogue, Fall, 1935

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

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

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

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

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

10. Hall: Ice Cutting on the Hudson
November 13, 2018

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

12. 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

13. 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

14. 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

15. 14th Amendment Ratified July 9, 1868 Section 1
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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

16. How is Ice Different from the Cotton Gin?
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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

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

18. Ice Economics Natural Monopoly?
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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?
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19. Answer As to production As to transportation
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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

20. 11/13/2018
Answer
As to entrants
1/3 are existing public utilities (electricity, gas and water) (FN 18)
November 13, 2018

21. Evolution of Convenience and Necessity Statutes
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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
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22. Key Qs How should we understand these groups analytically?
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Key Qs
How should we understand these groups analytically?
What are the legal categories that explain these results?
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23. 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
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24. 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

25. Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26)
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Sec. 13 of 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

26. Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26)
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Sec. 13 of 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

27. Sec. 13 of 1907-08 Act: Virtual Monopoly (FN 26)
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Sec. 13 of 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

28. 1925 Ice Act: Certificate of Convenience and Necessity
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1925 Ice Act: Certificate of Convenience and Necessity
Necessity/Preexisting Sufficiency
Standard Setting
Mandatory Service Obligation
Grandfathering
November 13, 2018

29. 1925 Ice Act: Certificate of Convenience and Necessity
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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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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