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Perspective

Fortnightly Magazine - April 15 1996

a ski resort? She could even make her own deal for electric power wheeled in from Tasmania.

Why shouldn't a consumer enjoy a choice of voltages for his household electric service? After all, 440 volts might be more efficient than 110, even though 440 carries the threat of electrocution. Consumers are thrilled at the number of places they can go to buy a phone, even if they don't know whom to call when the phone is dead. And the choices offered on a voice-mail menu surely represent a great improvement on the human operator (em now on layoff.

Incentives for Some

Other, more wistful memories still linger from the era of the regulated monopoly. One such memory recalls the cadre of secure and contented employees with lots to spend at the local department store at Christmas. Utility executives and managers always stood available to lend a hand with the annual drive for the Community Chest. Such homely touches may find no refuge in the gaunt world of competition. Regulated monopolies served as exemplars of lifetime employment and of a dependable and enduring community role, but these comforts are likely victims of competition. Markets focus on efficiency. International markets, particularly, demand tireless vigilance in jettisoning surplus human resources.

Deregulation and competition offer fewer jobs and smaller pay for ordinary folk, but better stock options for the folks at the top. Competition pushes worker pay down, but pulls executive compensation up. Getting competitive means different things to different people. Incentives for lesser employees are not needed as they seem to be in the case of executives. Chief executive officers (CEOs) apparently need incentives, preferably tied to the stock price, in order to get them to do their jobs. Workers seemingly will do their jobs without incentives.

Homage to Averch-Johnson

The philosophy animating many of the antique monopolies was peculiar. Without becoming maudlin, one should recognize that the obligation to serve often rose above a simple legal theory. Admittedly, the rendition of service marked the sine qua non of retaining an exclusive franchise, but in many a hulking monopoly, the notion of service developed a life of its own. Utility managers were compelled by law, and by their own peculiar culture, to keep the lights on or the phones ringing (em no matter what. Admittedly, monopoly managers knew they would someday recover the cost incurred in such efforts (em however astronomical (em in regulated rates.

That guarantee of cost recovery gave rise to the Averch-Johnson effect. Under that hypothesis, utilities built more and bigger plants than necessary to earn a higher return. Supposedly, under competition this distortion would disappear (em just another victim of efficiency. Nevertheless, Averch-Johnson has supplied a handy demon to invoke in hostile musings about regulated monopolies. Now critics won't have Averch-Johnson to kick around any more.

Mergers and Mutual Funds

The new era portends yet another predictable yet ominous prospect. In the age of pitiful, stumbling monopoly giants, there appeared no need for mega-mergers (with apologies to Sam Insull). After the holding companies suffered their death sentence, they were not replaced.