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?
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 (79 percent), but roughly at a 15-percent smaller scale of operation."
In other words, get smaller.
And regulation made no difference. Whether there is a required sales obligation or sales are unrestricted, "the optimal firm would choose to generate less power than the restricted average firm, and to reduce the sales volume."
As for vertical integration, the report observes that elasticities of substitution between generation, transmission, and distribution reveal "the ease with which inputs in one function can replace those in another." (By cutting line loss, distribution upgrades can offset generation capacity.) However, the study finds that neither energy nor distribution labor can easily substitute for transmission investment:
"The results strongly reject the hypothesis of separability of the three major electric utility functions."
You might view computer software as too far removed from Kirchhoff's laws to have much effect on the structure of the electric utility industry. But you would be wrong. The Federal Energy Regulatory Commission (FERC) is now devoting considerable effort to regulating bits and bytes.
In December 13, 1995, in Docket No. RM95-9-000, the FERC issued its Notice of Proposed Rulemaking (also known as the InfoNOPR) on real-time information networks, or "RINs." (Others insist on "electronic information networks" [EINs], or "transmission service information networks" [TSINs].)
The FERC wants to avoid the "Tower of Babel" that it created with electronic bulletin boards for natural gas pipelines, and to guarantee trouble-free downloading for all electric RINs users. It also wants to define available transmission capacity (ATC) for the contract path on a "business needs" basis (em as if anyone actually needs to know the contract path anymore (em but that's another story for another column.
Anyway, the FERC believes it can guarantee transmission equity by putting RINs up on the Internet, complete with browsers and HTML codes suitable for the World Wide Web. But is the FERC getting mired in details? Here's a snippet:
"The Commission requests comments on how the data ... should be formatted. Should it be in free-form text, predefined tables, or comma-delimited ASCII files? If in free-form text, should it be in plain ASCII text or in a word processor format such as WordPerfect or Word?"
In the March issue of The Atlantic Monthly, James Fallows suggests that individualized, user-specific software may become a thing of the past since such functions are supplied by programming internal to the Internet. In his article ("Computers: The Java Theory") Fallows notes that when you want to buy a new telephone service, such as voice mail or call
forwarding, "[Y]ou don't have to buy extra memory chips for your phone or get an upgrade for your telephone software, as you would in the computer world." The software is already on the network. "You buy whatever phone you want; you plug it in; it works."
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