Why are Power Companies Monopolies?
Good question. At least as far as the distribution of electricity, power companies are "regulated monopolies." The idea has to do with what economists call natural monopolies. If you have a product which requires very high fixed costs a relatively low variable costs such you may end up with a natural monopoly. In the case of a power company, putting together a power grid to supply power to a community is very expensive (high fixed cost), but adding one more home or business to the grid is inexpensive, (run a line from the grid to a home and attach a meter to the house). This means that the per unit cost of adding more homes keeps falling, even at the point that the power company has hooked everyone up to the grid. The thought is that if your had two power companies in the same community, they would both have to duplicate the very expensive fixed costs, but have fewer homes and businesses each over which they can spread the fixed costs. Thus, the per unit (home or business) cost of providing electricity will be higher than if you have only one power company.
However, if government grants a monopoly to keep the cost of providing electricity low, government must also regulate the monopoly to ensure that it does not use its monopoly pricing power to charge high prices and make excessive profits. Thus, the government creates a government entity which monitors to monopoly and which sets the price that the monopoly can charge.
While this sounds great in theory, it is not without problems. Often the government will set prices to provide the company with a reasonable profit. For example, the government might decide that 10% over costs is a reasonable return. However, if the return is based on a cost plus 10% basis, this can be an incentive for the power company to increase its cost. Thus, it is not unusual to see power companies pay salaries that are a bit higher than average. They may try to justify the purchase of assets that are not really needed, etc.
You would think that the government would catch on to these games as prohibit the power company from inflating its costs. However, there is the problem of regulatory capture. The government regulators deal with the same people from the power company day after day. Of course then tend to become friendly. In contrast, the average rate payer does not have the time to closely follow what the power company is doing. These practices might cost the average rate payer a few hundred dollars a year, but not enough that they can take time of work and go complain to the regulators. In addition, there is a lot of movement of personnel between the power company and the regulating body. If you are a regulator, you best career move is likely going to be to go to work for the power company. This provides a personal incentive for regulators to keep the power company happy.
To try to solve this problem, many states set up a separate agency to police the regulators and to act as a voice for the average consumer. This helps, but does not completely eliminate the problem. After all, if you are making a career learning about power company regulation, your career options are still primarily going to be with the primary regulator or the power company, itself.
There is also the issue of stifling new technologies. Once you set up a monopoly system eliminating competition, there is not a lot of incentive to develop new technologies. If a competitor is barred from entering the market, they have no incentive to develop new technologies and compete with the current system. For decades there was little change in telephone technology, in large part because the telephone system, including long distance service, was all a regulated monopoly. Since the monopoly was broken up and competition was allowed, we have all seen the incredible technological development in the area. Thus, utility regulation tends to create a static situation, freezing a particular technology in to place. Since we cannot know what did not happen, we really have no idea of what new technologies may have been developed to provide people with electricity, if the regulated utility model had not been adopted.