[BETA] Fortnightly

On a bookshelf behind my desk I've stacked up a few older issues of PUBLIC UTILITIES FORTNIGHTLY. Some of them go back more than a half-century. Every so often I pull down a copy to see if I can learn anything from history.

Yes, the advertisements appear quaint (Royal typewriters; IBM punch-card machines; Ditto-brand duplicators). But some of the ideas still have legs, with lively quotations from the likes of Louis Brandeis, Harold Ickes, Walter Lippmann, and Fiorello La Guardia.

In the issue of June 4, 1936, my eye settled on a two-page report from the International City Managers' Association, describing municipal ownership and operation of all public utilities during the year 1935, among some 930 American cities having a population of 10,000 or more.

The report lists 10 different categories of public utility, ranging from waterworks to airports to abattoirs. Abattoirs? In 1935 only one large city (Philadelphia) reported municipal ownership of a gas distribution utility. Five major cities operated electric utilities (Detroit, to a limited extent, plus Cleveland, Los Angeles, Columbus, and Seattle). But fully three dozen cities reported municipal ownership and operation of a regulated abattoir.

Where did they go?

Scale Model

With the recent flood of utility mergers, involving both electric and gas operations, everyone wants to know whether bigger is really better. Is there a future for vertical integration? Utility economists can be seen turning away from pricing efficiency to reexamine theories of industrial organization. How, exactly, should one organize a business that might perform no other function than own and operate a transmission network?

In January, the National Regulatory Research Institute (Columbus, OH, 614-292-9404) released a study entitled "Economies of Scale and Vertical Integration in the Investor-owned Electric Utility Industry," by Herbert G. Thompson, David Alan Hovde, and Louis Irwin, of Christensen Associates. It builds on former works, such as Christensen and Greene, "Economies of Scale in the U.S. Electric Power," published in 1976 in the Journal of Political Economy. But the NRRI study differs in that it adopts a so-called "restricted profit model" that recognizes the effects of utility regulation.

The new report analyzes all major investor-owned electric utilities in the United States for the years 1977, 1982, 1987, and 1992. It compares economies of scale (size), scope (integration), and density (customer concentration) among generation, transmission, and distribution functions, including relative elasticities (ease of substitution) for inputs such as fuel, capital, and labor.

In general, it finds that the collapse of economies of scale in electric generation that occurred in the 1970s and 1980s seems to be reversing to some degree, particularly for the largest firms. But, it also finds that many electric utilities might boost efficiency by generating a smaller share of their overall system load and by reducing their overall sales level:

"The typical profit-maximizing firm would produce about 83 percent of the current sample mean generation supply level, while selling about 85 percent of sample average sales volume. ... In other words, the optimal firm would generate about the same fraction of its final sales (77 percent) as the average 1992 firm