All right, continuing our discussion of the electricity industry, there are some concepts and definitions that are useful as a starting point. The first one is from Economics, is the idea of a natural monopoly. So here's the formal definition, a natural monopoly exists in a particular market. If a single firm can serve that market at lower costs in any combination of two or more firms. Some examples, roads, think of the road outside where you are now. It wouldn't make sense to have competing roads to have multiple roads, to have different private sectors. Companies trying to build roads in different places, that just kind of intuitively doesn't make a lot of sense. Airports, an area has an airport, it seems like it wouldn't work very well if there were multiple companies trying to build multiple airports and competing with each other for air traffic. Similarly, water and sewer service. There's a water line running to your raw water or clean water, potable water running to your building probably. There's a sewer service taking not clean water away. That function is most likely served by a government agency. One of the arguments being, it's a natural monopoly. It just makes sense for their only to be one organization providing it. So just to make a distinction, a natural monopoly function can be provided by a private sector company or by a government agency or government firm, we'll talk about that just a minute. Now, the question becomes, is electricity and natural monopoly? Well, this gets opinions differ that it was believed to be the case that it was largely around much of the world until about the 1980s, when thinking about this changed. It's interesting if you look at the history of electricity in the earlier as it was not strictly regulated, not seen as a natural monopoly, and there were different competitors in the industry. But sooner or later a couple or in some cases, one company or set of companies emerged and because of abusive practices, basically high prices and poor service regulation emerged as a way to limit that. So it's been a, it's been a bit of back and forth throughout the history of electricity. But generally throughout much of the 20th century, it was believed that electricity was a natural monopoly. Again, that thinking started to change about 1980s, early, maybe early mid-1980s, and accelerated in the 1990s and 2000s. And now we have this odd mix, which we'll talk about just a minute. Another term that's useful to recognize is that of a utility, but this term to be viewed a little suspicion because different people use the word utility that is now an electricity and electricity industry a lot of different ways. So when someone says to you about the utility, it's sometimes useful to clarify what they're thinking. In my position or view is that there's not a right or wrong here, what's important for languages to communicate. So if someone talks about the utility, you sometimes might need to get a little more information from them to clarify what exactly they're referring to. Most people when they say the word utility and in the context of electricity, they mean whoever they buy electricity from, and that's fine. There's another term you'll hear, which is a public utility, which gets back to our natural monopoly concept. A public utility is defined as a business organization, performing a public service and subject to special governmental regulation. You might also hear the term regulated monopoly as well, because, imagine you're in a situation where there is or believed to be a natural monopoly. That is, it makes sense for only one organization to provide a service or product. Well, that could be provided by a government agency. The government can build the roads and own the roads and let you use them. Or since we're all part of the government, we can all access the roads because the government is ours. Or a private company can for example, build an airport and run an airport and get paid for that service by the government but it's the only company doing it. And that would be a regulated monopoly. And as we'll talk about shortly, that's the way a lot of electricity industry works. All right, so let's step back a bit and talk about come back to this diagram we've talked about in the context of technology and remind [COUGH] you that the three main functions, the three main things that have to happen for electricity to show up is Generation, Transmission and Distribution. We've talked about the operation side of that and a bit about the technology side. Again, now we're talking about the institutions like who generates electricity? Is it a government or a company or regulated or not regulated? Similar questions for transmission and distribution. So let's start to dive into how it actually works and again, to emphasize it very significantly by country, within country and over time. But in general, it's a starting point. Here's one way to start thinking about it. Let's talk about electricity generation, transmission, distribution and then the consumer in your building. Well, as a starting point, the consumer pays electricity bill. You pay a bill, you probably get a bill every month from your utility and you pay them what happened to that money? Well, one way to think about is the starting point is the money flows to make these three things happen because it costs money to make electricity to move at long distances and to distribute it to your house. So one way to think about your electricity bill is, I'm paying for those three services and how much of whom and who does what, that's a more detailed question. In general, in many cases there is a regulator, there is a government agency, a regulatory agency, which is in all cases, I can think of a government function. The government regulates this. In some cases the government does this. The government can actually own the transmission system or more typically or commonly, there's some other sort of organization that owns and runs a transmission system, but with the government overseeing it. And you can imagine why that would be appropriate if there's only one provider, imagine one company owned the distribution system to your house and it was unregulated, it could do whatever it like. Well, that wouldn't be optimal because they could charge whatever rates they wanted, they could provide whatever quality of service they wanted. And you as a consumer couldn't do anything about it. You can't say, hey, I'm going to go buy my electricity elsewhere. The only thing you can do is go off grid and that in many cases just not practical. So in cases where there is a private sector participant either in the generation, transmission and distribution side, in most cases, they are regulated, but not all are exceptions to everything here. But in most cases there is a regulatory role, if there is a private company in a monopoly situation, there is a regulator involved in kind of keeping an eye on that. So we'll stop here, pick up the next video talking more detail about the terminology in this industry.
