Regulated public utility monopolies are not 'natural'

In both Austrian Economics theory and real world practice, markets are just a convenient and aggregated description of the constant flux of exchange opportunities created and discovered by suppliers and consumers with "skin in the game". And, of course, "[d]efining a market narrowly enough will always yield market power; defining a market broadly enough may always yield perfect competition" thus "[a market] cannot be independently established as such apart from consumer preference on the market".

As to perfect competition, perhaps economics Nobel Laureate Friedrich von Hayek said it best: "… competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis" thus "… perfect competition means indeed the absence of all competitive activities."

More importantly, the little known history of natural monopoly (in the US, at least) teaches that there was plenty of effective competition (and its attendant decreasing costs and prices, and increasing quantity, quality, service and innovation) prior to the less effective competitors lobbying for market protection regulation in exchange for utility oversight regulation. In fact, the regulation of natural monopolies started well before the theory of natural monopoly. Plus, if a utility monopoly were natural that is, it could produce at a lower total cost than all others, actual and potential) it would not be in need of all of the other types of regulations (intentionally and unintentionally) preventing market entry.

Market Conduct (#4 #5)
All the different approaches to market conduct under utility regulation are all founded on the (explicit or at least implicit) assumption that value (particularly costs) are objective and that they do (or should) determine prices. Firstly, costs are prices too, just from another's point of view. Secondly, causation largely flows the opposite way from prices to costs, not costs to prices. Thirdly, all values (that determine opportunity costs and prices through exchange) are subjective not objective. Fourthly, pricing and other value related decisions are made at the margin – margin meaning "what happens next", not necessarily one additional unit of output and certainly not an infinitesimal change as per the calculus.

All of this was established by one of the founding fathers of the marginal revolution in economics (for both Austrian and Neoclassical Schools), Carl Menger, who said: "Value is … nothing inherent in goods, no property of them. Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men." Another way of putting this is: "Marx would say pearls have value because people dive for them (thus supplying labor). Menger would retort that people dive for pearls because people value them."

It is also worth noting that in real world free markets, prices are determined in exchange by Eugen von Böhm-Bawerk's marginal pairs, often between extremely narrow margins.

Market Performance (#6 #7 #8)
The regulatory debates in the US (and increasingly in the UK, Australia and NZ) tend to centre around returns only. In addition, such return debates outside the US (unlike where broader commercial and fairness factors are more important and explicit) are very much focussed around finance theory rather than finance practice – almost always the weighted average cost of capital (WACC) and the capital asset pricing model (CAPM), plus increasingly financeability.

As per Frank Knight (and unlike WACC and CAPM), the real world of free markets is more about dealing with unquantifiable uncertainty rather than semi-quantifiable risk. Interest is the less uncertain reward to capitalists (including management), whilst profit is the more uncertain reward to entrepreneurs.

It is important to understand that interest is more fundamental than just bank interest on money. As Hayek's contemporary Murray Rothbard said, interest is: "… the pure exchange ratio between present and future goods. This rate of return is the rate of interest."

Returns are, of course, profits and losses compared to assets and liabilities. Based on this and many other factors, entrepreneurs, savers, investors and others react to this and other information and thus set their expectations going forward for future returns. In this regard, Rothbard stated: "… there is no sense whatever in talking of a going rate of profit. … For any realized profit tends to disappear because of the entrepreneurial actions it generates." He importantly added that: "A grave error is made by a host of writers and economists in considering only profits in the economy. Almost no account is taken of losses. … [from] when an entrepreneur has made a poor estimate of his future … ."

As for entrepreneurs, Spanish Professor Jesús Huerta de Soto reminds:

Neoclassical theorists view entrepreneurship as an ordinary factor of production which can be allocated depending on expected costs and benefits… their thinking involves an insoluble logical contradiction: to demand entrepreneurial resources based on their expected costs and benefits entails the belief that one has access today to certain information (the probable value of future costs and benefits) before this information has been created by entrepreneurship itself…until this process of creation is complete the information does not exist nor can it be known.