Earlier quoted context omitted.
The utility market used to be competitive, then municipalities began "licensing" them, which eventually led to the current state of affairs.[1] Even lighthouses, which have large externalities, can be built and operated without government intervention, as they did for a very long time.[2] [1] http://www.econlib.org/library/Enc/ElectricityandItsRegulati... [2] http://en.wikipedia.org/wiki/The_Lighthouse_in_Economics
The utility market moved towards a regulated model in the very early days of electric and gas transmission. There were lots of really good reasons for this around safety, universal service and public good. Most states today have a model where delivery is tightly regulated, but electricity generation is a competitive marketplace. At the end of the day the government exists to serve the public interest.
I would add to that that the free market definitely does not exist to serve the public interest, as far too many fans of it tend to forget.
Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all. -- John Maynard Keynes
There are places where the free market is ideal - utilities, such as Internet service (which requires either right of way on private land or permission to transmit and receive without interference on public airwaves) is not one of them.