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Stranded Utilities: How Demographics, Not Management, Caused High Costs and Rates

Fortnightly Magazine - June 1 1997

costless, transition to a more diverse and competitive global market for motor vehicles.

Insofar as such considerations apply to electric power with equal or greater force, they offer a reason for the recovery of stranded costs (em a reason that stands independent from issues of fairness. It is a reason augmented by the case at hand, in which competition alone cannot address industry "externalities," such as nuclear costs. t

Glenn D. Meyers, Buckner Wallingford, II and Horace J. DePodwin are principals of Economic Studies Inc. in Newark, N.J.

Comparing Automobiles and Electricity

How the cost burden was redistributed

Between 1965 and 1980, competition in the American automobile market was transformed, profoundly altering what had been a relatively static industry structure. The shock came not from deregulation, but from an export offensive by foreign producers. However, from the standpoint of both consumers and incumbent suppliers, the effects and policy implications may be similar to those entailed by the deregulation of electricity generation.

Over the 15-year period cited above, the share of the U.S. auto market claimed by imports jumped from 5.8 percent to 38.5 percent, according to figures from the U.S. International Trade Commission. A $6.2-billion annual profit for the U.S. motor vehicle industry was converted into a $4.3-billion loss. Three months later, in April of 1981, the Japanese instituted a "voluntary export restraint" on automobiles shipped to the U.S., a program still in force. In recent years, Japanese exports have been below VER quotas. However, estimates show that when the program was most restrictive it imposed an added cost of $1,000 to $2,400 per vehicle exported to the U.S. Added to "Buy American" policies, low-interest loans to Chrysler, and ad valorem import duties of 2.5 percent on autos and 25 percent on light trucks, the price support provided by the VER has been sizeable, at critical times at least.

The manner in which these and related sources promoted global competition at an acceptable social cost may provide a lesson for the electricity industry.

1William J. Baumol and J. Gregory Sidak, Transmission Pricing and Stranded Costs in the Electric Power Industry (Washington, D.C.; American Enterprise Institute, 1995), pages 104-105.

2Cajun Elec. Power Co-op. v. FERC, 28 F.3d 173 (D.C.Cir.1995).

3Robert J. Michaels, "Stranded Investment Surcharges: Inequitable and Inefficient," PUBLIC UTILITIES FORTNIGHTLY, May 15, 1995, page 24.

4See, for example, the decision of the D.C. Circuit in Cajun Electric, note 2, and Phillip Areeda, Antitrust Analysis, Third Edition (Boston: Little, Brown, 1981), pages 732-739.

5See, for example, Paul Joskow, "Does Stranded Recovery Distort Competition?" The Electricity Journal, April 1996, pages 31-45. Of course, insofar as the overall demand for power is inelastic, a distribution charge to recover stranded investment would lessen the sales of all generators somewhat, in the same way as would a tax on power consumption.

6Phillip Areeda and Donald F. Turner, Antitrust Law, Volume II (Boston: Little, Brown, 1978), pages 282-283.

7Alfred E. Kahn, The Economics of Regulation, Volume II (Cambridge, Mass.: M.I.T. Press, 1991), page 236.

8Urban concentration is measured by a dummy variable, with values in excess of 90