Do mergers and "critical mass" really make a difference? The answer, it seems, is yes.
To become more competitive, U.S. electric utilities have embarked on a quest in recent years to improve operational efficiency and factor productivity. The question is: Are utilities making progress? And, which companies have gained a competitive edge? Which have not?
Industry analysts have long argued that given the structure of the markets they serve and their cost-based, rate-setting procedures, electric utilities tend toward monopolistic behavior. Consequently, they are prone to wasteful applications of resources, especially overcapitalization. Without proper incentives, the argument went, utility managers have little motivation to cut costs or improve efficiency. As Hicks has argued, they would be more likely to exploit their market power by not bothering to approach maximum efficiency. "The best of monopoly profits," Hicks suggests, "is a quiet life."
These arguments, however, are waning quickly as the bang and clatter of competition disturbs the utility manager's "quiet life." Prompted by the discipline imposed by competitive markets and the demands of incentive regulation, utilities are paying increasing attention to the economic fundamentals of electricity production and delivery.