Second, the negative character of public regulation—its reliance on veto of private decisions—proved to be a fatal defect. The initiative was always in private hands and decisions tended to reflect private, not public, interest. Thus, private monopolists made the basic decisions involving organization, investment, finance, techniques, rates, service, and managerial policy. If regulatory commissions subsequently intervened to exercise their veto power they found themselves confronted with a fait accompli. Certain of these decisions, for practical reasons, could not be reversed; others could not be vetoed because the courts denied cornmissions the power to substitute their judgment for that of the management. This disability was perhaps not too serious when regulation dealt with small, local monopolies, but it proved formidable when they became powerful, complex organizations operating on a regional or national basis. Lacking positive powers and responsibilities, public regulation under these circumstances degenerated into a rubber-stamp process for legalizing private monopoly decisions.
Third, the process of capitalization, as it operates in public service monopolies, creates vested interests in the form of income expectations, which society must validate if essential services are to continue. A private monopolist bent on maximization of profit from the creation and sale of going concerns, if uncontrolled, will capitalize all income in sight plus all that can be anticipated from future exploitation of his monopoly position. The resulting claims to anticipated income—euphemistically termed "securities"—will be arranged according to some scale of priorities calculated to appeal to various types of investors. These "securities" will then be sold at the highest price obtainable. Their value will be enhanced by virtue of the firm's immunity from competition and its prospects for further aggrandizement of monopoly power. Thus the end result of this process is to place in the hands of individual and institutional investors beautifully engraved pieces of paper that represent claims to anticipated monopoly income and expectations for the continuance and expansion of monopoly. Thereafter, an important function of regulatory commissions is to invoke the sovereign power of government to validate these expectations.
Pursuant to this mandate, they must suppress competition, grant further privileges over new markets, services, or technologies, consolidate monopoly power by merger of competitive or substitute services, restrict investment and services, sanction discriminatory rate and service practices calculated to increase revenue or penetrate new markets, and compel consumers to contribute sufficient revenue to cover all operating costs, however extravagant, and to satisfy the income expectations of investors. All this is justified in terms of public necessity; but it is a fictitious necessity, predetermined by the decisions of private monopolists.
Fourth, the restrictive investment policy of private monopoly creates a chronic deficiency of productive capacity and, to alleviate it, public regulation must go beyond mere restraint and resort to subsidization. This takes two principal forms—compulsory capital contributions from consumers and privileged immunity from taxation. In the first, rates
are set at a level sufficient to cover all operating costs and normal returns on investment and, in addition, to provide some increment of new capital for expansion; that is, the police power is used to confiscate a portion of consumers' income and to transfer it to private monopolies, ostensibly for capital purposes. Since, however, commissions have no power to compel investment, there is no guarantee that such contributions will actually result in expansion of productive facilities rather than be diverted to income. In either event consumers are compelled thereafter to pay a return on sums they themselves have contributed.
In the case of tax immunity a company may be privileged to write off new investment at some accelerated rate—say five years—and to charge this accelerated amortization as a cost in the computation of its income tax liability and its rates for service. The result is a two-directional subsidy. Nonprivileged taxpayers are required to make good the deficiency in the federal revenue arising from such tax immunity. From this point of view the subsidy takes the form of an interest-free loan from the Treasury in the amount of the tax reductions at compound interest over the normal life of the new plant. The excess depreciation charges over the five-year period constitute a disguised capital levy against consumers to provide part of the capital for the new plant. Thus both taxpayers and consumers are penalized for the benefit of a private monopoly. The company gets a new plant partly at public expense and then is privileged to collect indefinitely a "fair return" on capital contributed by taxpayers and consumers.
Fifth, the economic failure of public regulation has been rendered more certain, and more calamitous, by its failures on the political front. The elaborate administrative and legal ritual of regulation, with its specialized vocabulary of rationalization—such as public interest, public convenience and necessity, fair value, fair return, and reasonable rates— has tended to obscure economic realities, to induce in the public mind a spirit of complacency, and to preclude the evolution of alternative arrangements, such as public yardsticks or private competition. For some fifty years people generally entertained the view that public regulation provided reasonably satisfactory protection against the excesses and aggressions of private monopoly. This illusion was dissipated by the events of the Great Depression and by the shocking revelations of corporate misconduct disclosed by subsequent investigations. Henceforth, no literate person would believe, as formerly, that public regulation could effectively control these powerful monopolies. Although public confidence in regulation has been at a low ebb for a generation, this lack of confidence has not manifested itself in a vigorous search for alternatives or in strong political support for constructive modifications of the regulatory system. Thus the bureaucratic structure of regulation endures long after public confidence in its functional vitality has disappeared.