According to Alan Stone in Regulation and its Alternatives , the justification for regulation is market failure. Natural monopoly is a case of an efficiency form of market failure. Examples are electricity, gas, telephone, and water. In these cases the supply is continuous through permanent physical connections.
Bargaining power is unequal.
The product is a necessity. There are no close substitutes. The product cannot be stored or easily transferred from one customer to another. The service is most efficient if produced by a single firm. Firms are characterized by declining marginal costs, high capital costs and high initial fixed costs.