Telecom was formerly considered as a public utility, which was also the case with water, gas and electricity supply. The traditional definition of the American term public utility is that it is an infrastructural necessity for the general public where the supply conditions are such that the public may not be provided with a reasonable service at reasonable prices because of monopoly in the area. This is the reason for regulatory intervention, namely to secure the interests of the public. At the same time, the public utilities can also be seen as natural monopolies, meaning that from a societal point of view the highest degree of efficiency exists with just one operator in the market area.
The reason for a higher efficiency with just one operator is based on large economies of scale and scope, meaning that there are increasing returns to scale and scope. Such a situation is in contrast to the general assumption in neo-classical economics claiming that there, at a point of time, will be decreasing returns to scale and scope and that competition, therefore, is the most efficient mode of organizing production in society. A natural monopoly situation constitutes a market failure and requires regulatory intervention of some kind.
With respect to telecommunication, the reasons put forward for characterizing this as a natural monopoly case have been the large necessary investments for setting up national telecommunication systems and the strong network effects associated with point-to-point communications. The implications are, that there are increasing returns to scale created on the production as well as consumption side.
In the monopoly period, there have thus been two partly contradicting reasons for regulating public utilities: on the one hand, to protect users from the abuse of public monopoly utilities; on the other hand, to protect the natural monopolies against competition. The rationale behind this second purpose is that there can be cross-subsidies inside the individual utility areas between geographic areas and different services. Utilities with monopoly rights will, therefore, have to be protected against competition at the fringes (cream-skimming). This can be seen as a social contract between public interests and monopoly operators in utility areas, and in retrospect has even been seen as a contract giving monopoly rights for universal service provisions. In most countries, this is a gross exaggeration, as monopoly operators only in few cases have developed a real national universal service. The obligations that monopoly operators mostly have had to live up to concern tariffs and quality of services, while broader diffusion has played a more limited role.
With the transition from the former monopoly regime to the present system with competition, the focus has changed regarding monopoly and competition. Though the natural monopoly argument can still, in some instances, be made in different market segments, the single-infrastructure argument does not take into account the inefficiencies caused by monopoly because of the lack of competitive pressure. The developments since the start of the liberalization of the telecom markets have fully shown the efficiency gains in introducing competition. Furthermore, technology changes have undermined the natural monopoly argument. Where formerly, at the high point of the monopoly period, there would be an implicit understanding among most economists that telecommunication was a case of natural monopoly, technology developments have contributed to changing this, as different networks can carry similar services and as vertical disintegration becomes easier, allowing operators to offer services on other operators’ networks.
 This definition is taken from William H. Melody: ‘Policy Objectives and Models of Regulation’, in William H. Melody (ed.): ‘Telecom Reform: Principles, Policies and Regulatory Practice’, Lyngby, DTU, 1997, p. 14. Melody in this piece elaborates on the basic reasons for and models of regulation. In the ‘Handbook of Telecommunications Economics’, Amsterdam, North-Holland, 2002, edited by Martin Cave, Sumit Majumdar and Ingo Vogelsang, there is a historical overview on the regulatory developments in the USA by Gerald Brock, pp. 44-74. The volume as such includes a number of papers on the basics of regulation and economics in telecom.