The "duty to connect" demands definition - such as the optimal investment in local wires, and who should pay for it.
As the electric utility industry continues its slow but inexorable...
s The economic dynamics of adjustment (as in Figure 3)
s Rates of return on possible stranded investments (e.g., TU)
s The price of reliability, including who pays for it.
Ferguson does raise some key issues that beg for further analysis, but we believe his letter distorts our example of the Averch-Johnson (AJ) hypothesis. Historically, TU could have relied more heavily on outsourced, wheeled interutility electricity within Texas (under ERCOT). Its current fixed-asset problems result from its previous strategic choices. Ignoring that, TEC and SDG&E might be dropped from the peer group in Figure 2. Then, Florida Power & Light would move up to best-in-class utility. Again, TU is out of economic position because it employs too much capital and too little labor. That is the essence of the AJ hypothesis.
As economists have long taught, "Everything has its price." That is true in the management of all competitive firms. Utilities must now exploit their substitution possibilities to meet the competitive challenge. t
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