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The oard of Regents of the University of Wisconsin System

The Public Utility Scissors and Economic PolicyAuthor(s): Warren S. GrammSource: Land Economics, Vol. 38, No. 1 (Feb., 1962), pp. 21-31Published by: University of Wisconsin Press

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The Public

Utility

Scissors

and

Economic

Policy

t

By

WARREN S. GRAMM*

PUBLIC

UTILITY

executives

argue,

not

surprisingly,

that the

present

rate of return on

public

utility

invest-

ments

in

the United

States

is not

suf-

ficiently

high

for

most

efficient

operation.

Given the

continuing

pressure

for

addi-

tional

utility

capacity

and

dependence

on the capital market for the largest por-

tion of

their investment

requirements,

operating

companies

are

chronically

short

of

funds sufficient to

carry

out

optimal

construction

programs.

To the

utilities

the

obvious solution

is

higher

rates of

return

(higher

rates to consum-

ers)

that

would

provide

a

small,

but

necessary,

margin

of

operational

slack.

The

public

interest

requires

that this

argument

be

carefully

examined.

If

rates

are

indeed

too low

for most efficient

growth,

the

quality

and

quantity

of

util-

ity

service

will suffer

compared

to

that

in

other

sectors

of

the

economy.

How-

ever,

if rates

of

return

to

public

utilities

are

adequate-competitive

with

other

sectors-then

rate

increases

are

not

war-

ranted.

Unfortunately,

we

do not

at

present

possess

the institutional means

or

factual base for

firm

judgment

con-

cerning

these

obvious,

normative state-

ments.

The

unavoidable,

informally

coordinated

division

of

labor

in

a

com-

plex,

market-oriented,

industrial

society

has meant that the

problems

and

per-

formance

of

public

utilities are

consid-

ered

in

one institutional framework

while

that

of

industrials

(and

others),

insofar as

they

receive critical

review

analogous

to

that

of

the

utility

sector,

are so considered in an entirely separate

setting.

At the

very

least this contributes

to

lags

in

the

response

of one sector

to

changes

in

another.

The

nature

of

the

problem

of

apprais-

ing comparative

sectoral

performance

and

hopefully

of

sharpening

the

issues

involved

in

policy

formulation,

can

per-

haps

be clarified

in

the

context of

the

public

utility

scissors.

First,

we

will

see how it

developed

as a

phenomenon

during

the 1950's.

Then

we

will

consider

the

extent

to

which

it still exists and

the

public

policy

implications

of

the

current

relationship

between

utilities

and

the

industrial sector.

The term

agricultural

scissors

has

been

used

to

characterize

the

peculiar

market

position

of

farmers.

Selling

in

a

competitive

market

and

buying

in

a rela-

tively monopolistic

one,

has

meant,

for

many,

an

involuntary

reversal of the

profit

maximizer's

credo- buy

cheap

and

sell

dear. Of more recent

origin

and

not so

readily recognized

is an

analogous

phenomenon-the public

utility

scissors.

The

regulated public

utility

company

sells its

product

under

conditions

that

may

be

regarded

as

induced

competition.

At

the

same

time,

like the

farmer,

most

of

its

purchases

are made

in

non-

regulated, monopolistic markets. Under

these

circumstances

the utilities must

also tend

to

sell

cheap

and

buy

dear.

t

Participation

in a seminar on the Financial

Problems

of Public

Utilities

sponsored

by

the Pa-

cific

Telephone

and

Telegraph

Company, June

12-

16,

1961,

Palo

Alto,

California,

provided

the

direct

stimulation

for preparation

of this

paper. Helpful

comments on an

earlier draft

were made

by

Fred P.

Morrissey, Bruce Glassburner, and

Stephen

H. Sos-

nick,

colleagues

at

the

University

of

California.

*

Department

of

Economics,

University

of

Cali-

fornia, Davis,

California.





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22

LAND ECONOMICS

Unlike

many

farm

commodities,

how-

ever,

the demand

for

services of

utilities

has

risen

persistently.

Faced

with a

con-

stant need for additional capacity and

steadily

rising

cost

of

capital

and

labor

needed to

provide

it,

the

public

utility

company

during

the

1950's

recurringly

came

before

the

regulatory

commission

urging

its need for

a

higher

rate

of

return.

I.

Nature

of

the Public

Utility

Scissors:

the Cost

Squeeze

on

Net

Returns

The

squeeze

on

regulated

public

util-

ity

companies (e.g.,

communication,

electric

power,

gas

and

water)

has re-

ceived minimal

notice

because:

(1)

their

performance

under

regulation

has been

relatively

satisfactory;

and

(2)

in

contrast

to

the farmer

they

face

a

basically

un-

sympathetic public.

Furthermore,

their

problem

is somewhat

more

complex

than

the farmers' at least

as

far as

public

understanding is concerned. This is seen

in the

two

major

dimensions

to

the

pub-

lic

utility

scissors:

(1)

the

price

squeeze,

analogous

to

that

in

agriculture,

wherein

the

utility companies

must sell

cheap

under

regulation-induced

competition

and

buy

dear

in

the

free industrial

market;

(2)

a

financial

squeeze

stem-

ming

from

their

high

capital require-

ments and

need to

raise

the

largest

part

of it in the competitive capital market.

To

a

considerable

degree,

however,

the basic

long-run problem

of

both

agri-

culture

and

the

public

utility

sector

has

stemmed

from

a common

cause-the

more

favorable

market

position

of

the

industrial

sector

of the

economy.

While

agriculture

and

major

public

utility

com-

panies

perform

under

competitive

conditions

(agriculture

because

of the

nature of the market and public utilities

because

of

the

regulation process)

basic

industry,

operating

under

conditions

of

monopolistic competition

or

oligopoly,

is able

to

exert market

control

of

varying

degree

and

of

various kinds

to

the

end

of protecting its price and profitposition.

Thus,

inflation

was an

important,

many

would

say

overriding,

characteris-

tic of

the United

States

economy during

most

of the

1950's-certainly,

the

infla-

tionary

potential

of

monopoly

in

labor

and

product

markets was

apparent

dur-

ing

the

period

1953-1958.

Considerable

literature

has

developed

concerning

the

nature

and cause

of

price

increases,

par-

ticularly since the Korean War.' We

need

not,

however,

become

involved

in

the

demand-pull-cost-push

debate

for

the

characteristic

of

the

inflation

most

relevant

for

our

purpose

here is not

controversial.

There

is no

question

that

there were

significant

differences

in

the

incidence

of

price

changes

in

various

product

and

industry

lines.

Thus,

the

first

dimension

of

the

public

utility

scis-

sors-the cost squeeze-is readily apparent

from

the

following

data.

Between

1945-1960

the

indices

for

consumer

and

wholesale

prices

increased

by

65

and

74

percent,

respectively.

The

rise

in

public

utility

rates

appears

to

have

been of

the

same

order

of

magni-

tude.2

In

rather

sharp

contrast,

the

index

of

prices

paid

by

utilities

for

con-

1

See,

for

example:

Wages,

Prices,

Profits,

and

Productivity,

by

the

American

Assembly,

Columbia

University, June,

1959.

Particularly

useful

are

sev-

eral studies

prepared

for the

Joint

Economic

Com-

mittee,

Congress

of

the

United

States.

See,

especially,

Otto

Eckstein

and

Gary

Fromm,

Steel

and

the

Postwar

Inflation,

Study

Paper

No.

2,

November

1959;

Emmette S.

Redford,

Potential

Public

Poli-

cies

to

Deal

With

Inflation

Caused

by

Market

Power,

Study Paper

No.

10,

December 1959;

and

Charles

L.

Schultze,

Prices

and

Costs

in

Manufac-

turing

Industries,

Study

Paper

No.

17,

January

1960.

2

Thus,

between

1953

(the

first

year

of

the

index)

and 1960 the United States Bureau of Labor Sta-

tistics

consumer

price

index

for

gas

and

electricity

rose

18.1

points,

or

17

percent.

According

to

Ray

E. Untereiner

a

study

by

the

California

Public





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8/10/2019 Yep, nerp


24

LAND

ECONOMICS

II.

The

Second

Blade

of

the

Scissors:

The Financial

Squeeze

The

high

production

costs

incurred

by

utilities

provides

the base for a sub-

sequent squeeze

in

the

capital

market.

Continually rising

demand for

service

combined with

their

capital-intensive

technology

have

meant

large,

regular

ad-

ditions to

utility

plant

since

World

War

II.

Still,

utility

executives

argue

that

the

operations

have been

impeded

by

insuf-

ficient

capital.

In

any

event,

the

scale

of

their

capital

requirements

are such

that

aggregative economic relationships are

strongly

conditioned

by

the

operating

problems

of

the

utility

companies.

Assets of

public

utilities,

other

than

transportation,

comprise approximately

one-fifth of

the assets of

non-financial

corporations

in the

United

States.

Be-

tween

1956-1960

some

40

percent

of

all

corporate

issues

were

for

public

utility

expansion.

Their annual additional

cap-

ital requirement averagedapproximately

$4.5

billions.

It is

in

light

of

the scale

of

these

financial

operations

that

we

must

examine

the

allegation

that

they

have

been

insufficient.

The

crucial

proposition

with

respect

to

the

financial

squeeze

on

utilities

is

that because

of

the minimum rate

of

re-

turn allowed

by

regulatory

agencies

(in

the

interest of

keeping

utility

rates

low)

private utilities are unable to accumu-

late

appreciable

reserves or

surpluses

for

self-financing.

A

study

of

seventy-seven

of

the

largest

electric utilities in

the

United

States

by

Fred P.

Morrissey

has

shown

that

between

1945-1955 some

85

percent

of

new

capital

was

raised

from

external

sources.4

In

the

period

1946-

1960,

thirteen

Pacific Coast utilities

were

able

to

finance

but

14

percent

of

their

new

capital

requirement

from retained

earnings.

These

figures,

representative

of the

long-term

pattern

for

public

utility

finance,

are in

direct

contrast with the

position

of

major

industrial

or manufac-

turing

concerns.

It

has been

estimated

by

the

United

States

Department

of

Commerce that in the

period

1946-1955

all

corporations

went into the

capital

market

for

only

one-quarter

of their

cap-

ital requirements, financing the remain-

ing

75

percent

from

retained

earnings.

It is in

this context

then-of

utility

and

industrial securities

competing

for

the

investor's dollar-that

comparative

rates

of

return

come

directly

into

play.

The

great

volume of

public

utility

financing

in

the

postwar period

attests

to

an

overall

competitive position

(stability

of earn-

ings

compensating,

where

necessary,

for

a lower rate of return). But utility repre-

sentatives hold that

the

very

bulk

and

regularity

of

their

capital

requirements

pose

serious

problems

of

absorption

of

new issues at

any

given

time. It is

as-

serted

that,

in

a

marginal

sense,

this

competitive

disadvantage,

vis-a-vis

new

capital, places

a constraint on

their

abil-

ity

to raise

funds in the volume

necessary

to allow

for

technologically

optimal

rates

of growth. Thus, while rising demand

over

time

might,

in

terms of

engineering

economy,

call

for

a

plant

investment

of

ten million

dollars,

limited

supply

of

capital

often

results in construction

of

a

facility

that

is

recognized

at the outset

as

uneconomically

small

in terms of

long-

run

growth

and

planning.

It

is on

such

grounds

that

the

argu-

ment for

a

higher

rate of

profit

(and

higher prices for service) are defended.

Efficient

operation

of the

utility company

requires

that some

operational

slack

4

In an earlier

study

of

utility

financing

for

the

period

1945-1956

Professor

Morrissey

found the

same basic relationship with respect to the Bell

system:

Financing

Outlook

for

the

Utility

Indus-

try,

The

Commercial

and

Financial

Chronicle,

July

24,

1958.





8/10/2019 Yep, nerp


PUBLIC

UTILITY

SCISSORS

AND ECONOMIC

POLICY

25

be allowed

for

management

to

make

the

decisions it deems best.

Further,

it

is

alleged

that

allowance of such

slack

through higher rates of return would

eventuate in

operating

economies

that

would

eventually

lead to lower

rates.

However

one

evaluates either the

sin-

cerity

or

economic

validity

of this

argu-

ment,

the

mere

fact

that it

is

strongly

presented by

representatives

of

the

pub-

lic

utility

sector means that it must

be

taken

seriously.

It means that continu-

ing

pressure

for

higher

rates will

be

placed upon public utility commission-

ers.

Finally,

perhaps

the

most

important

consideration from the

social

point

of

view is

whether a relative

deficiency

in

capital

allocation to the

utility

sector

has

occurred

alongside

the

accumulation of

redundant

capital

expenditures

else-

where in the

economy.

Clearly

then,

the

utilities'

case

for

higher

returns must be

appraised

within

the context of meaningful policy alter-

natives.

In

light

of

the

preceding

dis-

cussion,

policy

with

respect

to

public

utility

prices

and

profits

cannot

properly

be

separated

from

policy concerning

prices

in

the

non-regulated,

industrial

sector.

Judgment concerning

the

work-

ability

of

performance,

relative

to the

public utility

and

other

sectors

of the

economy,

is the

only

meaningful

basis

for evaluation of policy alternatives.

III.

Comparative

Performance

of

Utili-

ties

and Basic

Industry

The

following

summary

statement

comparing

the overall

performance

of

public

utilities and

industrials

(particu-

larly

the

steel

industry)

since

World

War

II will serve as much

to

underline

the

current

inadequacy

of

economic

analysis

for developing judgments concerning

economic

performance

as the

direct

pur-

pose

of

clarifying

the

broad

problem

of

integrating policy

for these two

major

sectors.

Appraisal

of

performance

in

non-competitive

(that

is

to

say most)

markets has not proceeded far beyond

the

specification

of

performance

criteria

some

two decades

ago.5

With

the

excep-

tion

noted,

little concentrated

effort

has

been

made to

put

flesh

and sinew on

the

bones

of

workable

competition.

The

difficulties

are formidable

and

scholarly

attempts

at

comparative

appraisals

of

the

overall

performance

of firms

and

indus-

tries

in both basic

industry

and

the

util-

ity sector do not exist. Lacking such

studies

the

following

observations

will

necessarily

be tentative

and

general.

A focus

on the

comparative

perfor-

mance

of steel

is

particularly

appropriate

in

considering

policy

with

respect

to the

first

dimension

of the

public

utility

scis-

sors-the

squeeze

on costs.

As

an

im-

portant

component

in a

large

portion

of

public

utility

plant

and

equipment

the

price of steel (and the general perfor-

mance

of

that

industry)

is a

strategic

variable

in

utility

costs.

However,

since

public

utilities

compete

in

the

financial

market

with

all

industries,

the

discussion

will

be

broadened to make

contact with

the second

dimension

of the

public

util-

ity

scissors

by

including

profit

data

for

major

industrial

firms.

Recognizing

the

pitfalls

confronting

even a meticulously detailed analysis of

An

early

statement was

that of

J.

M.

Clark,

To-

ward a

Concept

of

Workable

Competition,

Ameri-

can

Economic

Review,

June

1940,

pp.

241-256.

On

the

current

state of

knowledge

in

this

area Bain

has

written:

Some

very

simplified

a

priori

theories

have

developed

hypotheses

concerning

what

may

be

workably

and

not

workably competitive

structure

and

performance,

but

these theories

are

generally

oversimplified,

ambiguous

on

essential

matters,

and

untested. Extended

factual

investigation

is

re-

quired.

Joe

S.

Bain,

Industrial

Organization

(New

York,

New York:

Wiley

&

Sons,

1959)

p.

18.

Per-

haps the only major qualification to the above

statement

is

provided

by

Bain's

earlier

study,

Bar-

riers

to

New

Competition

(Cambridge,

Massachu-

setts: Harvard

University

Press,

1956).





8/10/2019 Yep, nerp


26

LAND

ECONOMICS

economic

performance

the

brief and

ag-

gregative

discussion

that follows

will

at-

tempt

only

to

provide

sufficient

grounds

for making an ordinal judgment con-

cerning

the relative

performance

of

pub-

lic

utilities

and

the

steel

industry.

If

it

can

be

established

that

performance

of

the

regulated

utility

sector has been

bet-

ter than

that

of

the

non-regulated

steel

industry

there

would be

a

prima

facie

argument

for

policy

oriented

toward

im-

proving

performance

(e.g.,

lowering

prices

and

increasing output)

in steel

as

a means of improving the economic posi-

tion

of

utilities

and others. The

compari-

son

of

performance

will be

discussed

within

the

framework

of workable

com-

petition

criteria:

profits;

efficiency,

es-

pecially

capacity

utilization;

expenses

of

promotion

or

demand

creation;

and over-

all

progressiveness.

It is

recognized

that

there

are

appreciable

differences

between

individual

firms

in both

sectors

with

re-

spect to the several performance criteria.

Nonetheless,

it

is

felt

that

the

average

relationships

to

be

emphasized

here

have

some

relevance

for

the

purpose

of

ap-

praising

overall

policy

alternatives.

Profits

provide

not

only

the

most

strategic

but

one

of

the

few

relatively

measurable

bases

for

evaluation of

per-

formance.

Given

the

ubiquity

of

public

utility regulation

and

acceptance

of

the

equity of a fair rate of return, net

profits

for

public

utilities

have

ranged

around

six

to

eight

percent

for

several

decades.

Recent

data

suggests,

however,

that the

industry's

concern

for

higher

rates of

return

(and

earlier

pressure

from

the cost

blade

of the

scissors)

al-

ready

have

had some

effect.

Thus,

For-

tune

magazine

reported

in

August

1961,

that

net

income

in 1960 for the

fifty

largest utilities in the United States was

8.4

percent

higher

than

in 1959.

The

median

return on

invested

capital

was

9.4

percent

compared

with

9.1

percent

in

1959.

Total

assets

rose

6.6

percent

to

a

total

of

64.8

billion

dollars

during

the

year. Net income on invested capital

ranged

from 13.1

percent

(Houston

Lighting

and

Power)

to 3.4

percent

(American

and

Foreign

Power).

The re-

turn

for

the

leading utility,

the

giant

American

Telephone

and

Telegraph,

was 9.1

percent-slightly

below

the

median.

In

July

1961,

Fortune

showed

that the

1960 rate

of

return

of

the

500

largest

in-

dustrials on a comparable base-profit

as a

percent

of invested

capital-had

a

considerably

wider

range

than that

for

utilities but a

comparable

median

return

on invested

capital.

In

the

steel

industry

profit

rates for

the

twelve

largest

firms

(which

account

for

approximately

80-

85

percent

of

capacity

at the several

lev-

els

of

production)

ranged

from

14.6

percent (McClouth)

to Colorado

Fuel

and Iron which had a loss in 1960.Again,

the

leader,

U.

S.

Steel,

was close to

the

median rate

of return with

9.2

percent.

It

is difficult to

detect

any

substantial

difference

in

the

most recent

profit posi-

tion of

the

larger

industrials

and utilities.

However,

a

significant

change

in

their

relative

positions

does

appear

to have

occurred-the

position

of

utilities has

markedly

improved

while a relative soft-

ening in demand has put some pressure

on industrial

prices

and

profit

rates.

The

adjustment

in

steel is

fairly

typical

of

6

Profits

in

1960

for

the

fifty largest

industrials

(ranked

by

sales)

ranged

from

21.6

percent (Ameri-

can

Motors)

to three

firms which

had losses.

Twenty-five

of these

companies

made

profits

of

10

percent

or

more.

The

median

return

on

invested

capital

for

the

500

was

9.1

percent.

While earn-

ings

declined

early

in

1961,

indications are

that

profits

of

major

industries

(autos,

chemicals,

steel,

electrical equipment, oil producers and refiners,

farm

equipment

makers,

etc.)

will have

risen

by

the

end of

1961

to

equal

or

exceed the

1960

figures.

Wall

Street

Journal,

August

2,

1961,

p.

1.





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PUBLIC

UTILITY

SCISSORS

AND ECONOMIC

POLICY

27

major

industrial

firms-lower,

but

ade-

quate

rates of

return have become

sta-

bilized at less

than full

capacity opera-

tions.

With

respect

to

the

second

perform-

ance

criterion-comparative

efficiency--

discussion

will

be limited

to

capacity

utilization.

The

complexities

involved

in

establishing

an

appropriate capacity

figure

for

any

given

firm are

well estab-

lished

and

fully recognized.'

Further-

more,

the difficulties

are

obviously

multi-

plied

in

any

attempt

at inter-firm

and

inter-industry comparison. Clearly, ques-

tions of

defining

relative

obsolescence,

of

distinguishing

between

cyclic

slack

and chronic excess

prevent

ready

estab-

lishment

of

any

precise, unambiguous

capacity

figure.

However,

the

analogous

problem

of

defining

full

employment

has

not

prevented

the

development

of some

consensus

on

the

tolerable level

of

un-

employment

and

the

beginnings

of

policy

moves based thereon. But in any event

the

problem

of

establishing

firm,

defini-

tive

capacity

figures

is of

a

different

order

than

that of

making

broad

performance

comparisons

based

on such

capacity

data

as are available. In

this

context,

it is felt

that

valid

generalizations

can

be

drawn

with

respect

to

comparing

average

ca-

pacity

utilization of utilities and the

steel

industry.8

For almost

a

decade after

World War

II,

the

steel

industry

in

the United

States

operated

at an

(annual)

rate

of 80-90

percent

of

capacity.

When in

production

during

this

period

it

operated

at

nearly

100

percent;

but

operations

were

inter-

rupted by strikes in 1949, 1952, and 1956

with

a

significant

cutback

during

the re-

cession

of

1954.9

The level

of

output

was

reduced

to

around 60

percent

during

the

recession

of

1956-57

and

operations

since

that time have

averaged

about

70

percent

of

capacity.1'

This

figure

seems

appro-

priate

for the

near

future.

With

respect

to an

overall

appraisal

of

performance

the

question

of

capacity

must be linked with that of profit. No

policy

issue is

necessarily

raised

if

signifi-

cant

unused

capacity

is

reflected in

low

rates

of return

or

losses.

However,

if

significant

unused

capacity

is

linked with

normal

or

excess

profits,

the

pres-

ence

of

monopoly

pricing

and

marketing

arrangements

is

suggested.

Steel

presents

one

of the

best

examples

of this

phenom-

enon.12

In

mid-1961

the

President's

eco-

nomic advisors estimated that profits in

steel for the

fourth

quarter

1961

will

be

between

7-9

percent

on

invested

capital

at a

utilization rate

of

70

percent

of ca-

pacity;

10-12

percent

at 80

percent

of

capacity;

and

13-15

percent

at a

utiliza-

7

For

a

comprehensive

discussion

of this

issue,

see

Bain,

Industrial

Organization,

op.

cit.,

pp.

358-362.

'

Based

on

his

twenty industry sample,

Bain con-

cluded

that

chronic excess

capacity

could

likely

be

found in ten

percent

of

the

manufacturing

indus-

tries in

the United

States-certainly

in

no more

than

twenty

percent.

There

are indications that

the incidence of

under-utilization is

now

consider-

ably

greater

than

Bain's

appraisal.

According

to

the McGraw-Hill survey of manufacturing capacity

...

manufacturing companies

on

the

average

were

operating

at

77

percent

of

capacity

at

the end of

1960. Business Plans

for

New Plant

and

Equip-

ment,

p.

1.

While this was a

recession-based

low,

the

McGraw-Hill

data

show

a

cumulative

increase

in

unutilized

capacity

after

the 1955

prosperity

peak

of

92

percent

(i.e.,

at

the

1959

peak,

85

per-

cent of

existing

plant

was in

use).

This

trend

parallels

the

cumulative

rise

in

unemployment

during

the same

period.

9

Eckstein

and

Fromm,

op.

cit.,

p.

30.

10

McGraw-Hill,

op.

cit.,

p.

13.

11

n

mid-October

steel

production

declined to

72

percent

of

estimated

1961

capacity

with a

general

expectation

in

the

industry

of

stability

at that

level,

or

of

further

decline:

Wall Street

Journal,

October

17, 1961,

p.

3.

1

John

M.

Blair has

argued

that

oligopoly

market

structure has a

built-in

tendency

for

prices

to

rise

with moderate

decreases

in

utilization.

Adminis-

tered Prices: A Phenomenon in Search of a Theory,

Papers

and

Proceedings,

71st Annual

Meeting

of

the

American

Economic

Association,

May

1959,

pp.

431-450.





8/10/2019 Yep, nerp


28

LAND

ECONOMICS

tion

rate

of

90

percent.

These estimates

included

the

wage

increase

effective

in

October

1961.

Estimatingexcess capacityin public

utilities

is

complicated

by

the vital

na-

ture of

their service

and the

related

need

to

provide

capacity

for

daily

and

seasonal

peak

loads.

Regulation

provides

a built-in

restraint

on

construction

of

additional

capacity.

Both

regulatory

agencies

and

utility companies

prepare

demand

projections

upon

which

utility

construction

schedules

are based.

It

seemsclearthatthe utility company'sn-

terest

would

be,

if

anything,

to

restrict

rather

than

over-expand

capacity.

In

contrast,

there

is no

analogous

institu-

tional

restraint

on

expansion

by

indus-

trial

firms.

The basic

relationship

with

respect

to

relative

utilization of

capacity

is to

be seen

in the

key

questions

to

be

asked of

each

sector:

with

respect

to

in-

dustrials,

the steel

industry

and

others,

it would appearto be How much ex-

cess

capacity? ;

or

public

utilities,

Has

expansion

kept

up

with

increased

de-

mand?

With

respect

o

the last two

criteria

or

workability -selling

osts and

progres-

siveness-there

do

not

appear

o

be

appre-

ciable

overall

differences

n

performance

between

industrials

and

utilities.

For

both

sectors

advertising

s

largely

of

an

institutionalnature oriented

to

main-

tenance

of

favorable

public

relations

rather

than to

a direct

increase

in

de-

mand

for

product

or

service.

Some

ad-

vertising

by

steel

producers

can

be

regarded

as

having

informational

and

promotional

ontent

for

their

customers.

A

certain

amount

of

advertising

by

pub-

lic

utilities

involves an

effort at

demand

creation

that

will

iron

out

their

load

curve and improve capacity utilization.

For

the

utilities

the

presence

of

the

regu-

latory

agency

provides

a

restraint

on

excessive

expenditures

for

public

rela-

tions.

However,

on

balance,

there

would

appear

to

be

no

firm

grounds

for

dis-

tinguishing

between their

performance

on

promotion

costs.

The

fourth

criterion,

the

issue

of

rela-

tive

progressiveness,

s

perhaps

most

diffi-

cult of all to handle in summary fashion.

Conceivably,

one

could

rank

the

firms in

each sector with

respect

to

relative

pro-

gressiveness

and

get

some basis

for inter-

sectoral

comparison.

However,

the

most

significant

difference

is in the

institu-

tional

setting

of

each

group.

It

may

be

argued

that

in

the

unregulated

sector

the

most

inefficient

operations

will

sooner

or

later

disappear

while the

regulatory

proc-

ess tends to protect the unprogressive util-

ity

operator.

In

any

case it is

clear from

the

record

that

progressive

firms

exist

in

both sectors-that

production

for

profit

under

regulation

can

provide pressures

for

progressiveness

that

effectively

substi-

tute for the

prospect

of

high

or unlimited

profits.

It is

in

this sense

that

utility

man-

agers

argue

that effective

and

responsible

regulation provides

not

a

guaranteed

rate

of return but a hunting license where-

in

the burden

is

placed

upon

them

to

attain

efficiency necessary

to

gain

the fair

rate of

return.

Further,

it must be

em-

phasized

that

efficiency

and

progressive-

ness stem from

the morale

and

capabili-

ties

of

individual

employees

(including

hourly

workers

and technical

staff as well

as

management)

as well as from the drive

for

profits.

From these summary considerations it

may

be

concluded,

at least

tentatively,

that with

respect

to

utilization of

capacity

Is

For

a

concise,

quantitative

summary

of the

relationship

between

advertising

and

economic

con-

centration

see,

Leonard W.

Weiss,

Economics and

American Industry (New York, New York: John

Wiley

&

Sons, Inc.,

1961)

pp.

509-511.

He

observes

that

advertising expenditures

in the

industrial sec-

tor are less than

one

percent

of sales.





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PUBLIC

UTILITY

SCISSORS

AND

ECONOMIC

POLICY

29

the

average performance

of

utilities

is

more

workable

or

socially acceptable

than that

of

steel

(and

other

portions

of

basic industry). With respect to profits,

promotion

costs

and

progressiveness

there

appears

at

present

to be

perhaps

no

essential

difference.

It

follows then

that

first

priority

for

policy

would

be

toward

improvement

of

performance

in the

free

(unregulated)

oligopoly

sector.

IV.

The

Public

Utility

Scissors

and

Economic

Policy

The private utilities propose that the

scissors

be

eliminated

by

raising

rates

and

profits.

This is of course the

solu-

tion

that has

been

thus

far

applied

to

the

analogous

problem confronting

agri-

culture.

However,

this

remedy

runs di-

rectly

counter to overall

policy

objectives

of

price

stability-inflation

control-and,

like

the

program

in

agriculture,

does not

make

direct contact with such

other

ob-

jectives of public policy as optimal use of

resources,

full

employment

of labor and

capital

goods

and

maintenance

of

a

desirable rate

of

growth.

Though

the

average

profit

rate

for

public

utilities

is

comparable

to that of

industry,

the

greater

need

of the former

for

new

capital

means

that their net

re-

turn

is insufficient for a

large

volume

of

internal

financing.

However,

while

the

cost squeeze may be off-at least until gen-

eral

inflationary

pressures

are

renewed

-the

financial

squeeze

is

still on

as

long

as

there are

successful

industrials

(and

others)

appearing

on the

capital

market

with rates of

return

equal

or

superior

to

the

utility

company.

But

public

policy

should

not

necessarily

be

oriented to

in-

creasing

the

incidence

of internal

financ-

ing. Quite

the

contrary.

A

difficulty

in

formulating effective policy for price

stability

is the

fact

that a

large

and stra-

tegic

sector of the

economy

can

avoid

the

impact

of

monetary

policy

by

financ-

ing expansion

without

recourse

to

bor-

rowing.

In this

sense,

then,

policy

should

be oriented not to expanding the base

of internal

financing

through

allowing

higher

rates

of returns

to utilities

but,

if

anything,

to

finding

ways

to

reduce

the

amount

of internal

financing already

extant.

As has been

indicated,

profits

for

both

large

private

utilities and

large

indus-

trials

have become

adjusted

quite

com-

fortably

to the

basically

uninflationary,

underemployed economy of the early

1960's.

If the

policy

response

to

the

operating

problem

of

public

utilities

is

to

raise

rates,

consumers are

left with less

purchasing

power

to

exert

in

the

already

faltering goods

markets.

While

outlays

for

utility

services

are

a

quite

small

in-

crement

of total

consumption

expendi-

tures,

rate increases

are

likely

to be

a

step

in

the

wrong

direction

with

respect

to stimulation of aggregate purchasing

power

and

economic

activity.

On

the

other

hand,

focusing

upon

performance

and

prospective

price

decreases in

the

industrial

(hard

goods)

sector is

to

look

in

the

right

direction.

There

are

perhaps

four

major

policy

alternatives

for

achievement

of

socially

acceptable--workably

competitive--per-

formance:

enforced

competition

(an-

ti-trust); private or self-regulation (in-

dustrial

statesmanship); public

regula-

tion;

or

finally,

public

ownership.

Addi-

tional

use

of the

last

does

not seem

to

be

a

meaningful

alternative

for

the

foresee-

able future

in

the

United

States.

Its

14Between

June

1960 and

June

1961

consumer

goods

prices

have

risen

only

1.1

points

to

127.6

1947-1949

=

100)

while the

wholesale

price

index

dropped 1.2 points to 118.2. The latter movement

was

representative

of

the

pattern

for

most

metals,

machinery

and

construction

materials.

Wholesale

prices

have

fluctuated

between

118-120

since

1958.





8/10/2019 Yep, nerp


30

LAND

ECONOMICS

primary

significance

will

remain that of

an ultimate

threat or coercive

force

to

restrain

extremes of

anti-social

perform-

ance. Industrial statesmanship, while

a

feasible

approach

for

individual

situa-

tions,

will

provide

a

general

solution

only

with fundamental

alteration

of

the

economic

system

(i.e.,

changing

the role

of

the

profit

motive).

We are

left

then

with the

public

policy

alternatives

of

extended

anti-trust

action,

a

broadened

base

of

public

utility type

regulation

(e.g.,

selective

controls),

or

doing

noth-

ing. For most, these choices would ap-

pear

to

be-as

is

commonly

the case

with

major

social

problems-a

matter of

selec-

tion

between

lesser

evils.15

At

first

glance,

it would

appear

that

in

terms

of

political

(in)feasibility,

there

is

little

to

choose

between

meaningful

ex-

tension

of

anti-trust

action

and

formula-

tion

of

price

and

wage

controls

for

selected

firms or

industries.

The

history

of anti-trust prosecution provides little

ground

for

expectation

that

it will

be-

come

a viable

tool

for

approaching

com-

petitive

performance.

And even

if

continuing,

vigorous prosecution

is

at-

tempted,

the

process

is

agonizingly-

probably

intolerably-slow

given

the

na-

ture

of

the

stability-growth problem.

For,

while

there

is

little overt

support

for

the

second

alternative-extension

of the

gov-

ernment's regulatory functions in the

private

sector-pressure

for action is

in-

dicated

by

the

recent

drift

in this

direc-

tion.

The

supporting arguments

of

a

few

economists

such

as Abba

P.

Lerner

and

J.

K.

Galbraith are

increasingly

being

buttressed by political and economic

pressures

for

price stability. Systematic

federal

intervention in

strikes

and

labor

negotiations

in

national

emergency

disputes during

peacetime began

under

the

Taft-Hartley

Act. Unaware

of

the

larger

implications

of their

action,

it

seems

quite

possible

that the

pressure

ex-

erted

by

the

Vice President

and the

Sec-

retary

of Labor in

settling

the

long

steel

strike of 1959 marked a turning point in

public policy.

Recurringly

since that

time

the federal

government

has

used

ex-

hortation

and

stronger

pressures

on both

unions and

management

to

minimize

inflationary

pressures.

In

short,

inflation

has

in

effect

been

defined as a

national

emergency

which

warrants

federal

in-

tervention.16

Thus,

short-run

indicators

as well

as

the long-run pattern of extended scope of

regulation

suggest

that the

prospects

for

this alternative

not be

underestimated.

While at

first blush

the

prospect

of

ex-

tending

the

sphere

of

public regulation

has

(as

it

always

has

had)

a

radical

ring,

it

may

as well be

regarded

as

merely

an

15An

argument

for

inaction

with

respect

to the

steel

industry,

despite

recognition

that it

presents

a

problem

of

misallocated

resources,

is

presented

by

M.

A.

Adelman,

Steel,

Administered

Prices

and

Inflation,

Quarterly

Journal

of

Economics,

Febru-

ary 1961, pp. 16-40. Adelman concludes: Perhaps

the

only

useful

suggestion

with

any

chance of

acceptance

is

simply

not to

make

things

worse.

p.

35.

While the United States has not been

particu-

larly

prone

to borrow

(or

learn)

from

European

political experience,

developments

there with

re-

spect

to

industrial

regulation

since

World War

II

are indicative

of the

general

nature

of

the

problem.

In

his

article,

Industrial

Price Control: French

Experience,

American Economic

Review,

June

1961,

John

Sheahan concludes

that

they

were

a

limited

success,

that: . . .

they

did

help preserve

a

condition

of

rapid

expansion

without inflation.

(and

that)

. .

.

their

application

to

concentrated

industries

created

a

pattern

of

price

change

.

. .

[that]

might

well

be

judged

to

have come closer

to

a

competitive

structure

than

that

in

the

United

States.

..

.

p.

358.

Also

see,

Mark W.

Leiserson,

A Brief Interpretive Survey of Wage-Price Prob-

lems

in

Europe,

Joint

Economic

Committee,

Con-

gress

of the

United

States,

Study Paper

No.

11,

December 1959.





8/10/2019 Yep, nerp


PUBLIC

UTILITY

SCISSORS

AND

ECONOMIC POLICY

31

extension

of

a

long

line of

public

policy

and economic

thought.

The

present

or

(better)

pending

debate

on

selective

controls n the oligopolysectormaybe

compared

with discussions

n the

early

1920's

concerning regulation

or

public

ownership

of

electric utilities. The

con-

cept

of workable

competition

carried

with it from

the

beginning

the

implica-

tion

that

public

policy

(anti-trust)

be

implemented

to

bring

unworkable

in-

dustries, firms,

or

sectors

back toward

conformity

with

the

competitive

norm.

In this light Lerner'sproposal o achieve

the

same end

via

selective controls takes

on

a less

revolutionary

air.

Thus,

in

the

historical context

of more than a half

century's

experience

with

monopoly

reg-

ulation and

the

economist's

long-lived

concern for

competitive

performance,

one

might

perhaps

as

well

be

surprised

at

the

delay

in the

suggestion

of

selective

controls

as

at the

fact

that

such

a

step

has been seriouslyproposed.

Today's

public

utility

executives

uni-

formly

embrace

he

regulation

hat

many

of

their

counterparts

bitterly

opposed

at

its

inception.

Unable to

trust

the

states-

manship

of

their

colleagues

they

prefer

the

security

of

regulation

o

the

prospect

of

renewed

monopoly performance

and

reopening

the threat of

public

owner-

ship.

Yesterday Roger Blough, President

of

U.

S.

Steel,

strongly

rejected

Pres-

ident

Kennedy's

mportunings

or

price

restraint and

denied

the

propriety

of

such

government

ntervention

n

private

affairs. But tomorrow?One

can

almost

hear his

counterpart

of 1984

vigorously

affirming

support

of

regulation.

He

wouldn't have

it

any

other

way-for

after

all, consider the alternative.

V.

Epilogue

These

last

remarks

are

no

general

brief

for

regulation.

Its

checkered

history-

its

limitations,

perversion,

and waste

through

duplication

of resources-is

much

too

apparent.

There

are

good

rea-

sons

to

expect

that

these

elements would

be

part

of

its

extension. An

addition to

the regulative structure can be defended

only

in

terms

of

the

problems

involved

and the

absence of

preferable

alterna-

tives.

But

broadening

the

base of

regulation

does not

necessarily

mean a

net

increase

in

government

intervention

in

the

econ-

omy.

Quite

the

contrary.

Reduction of

inflationary

potential

and

general

im-

provement

of

performance

in

the

oli-

gopoly sector would carry with it a

weakening

of the

rationale

for

agricul-

tural

price

supports

and

simplification

of

the

regulatory

problem

for

public

util-

ities.

These

potential

reductions

in

exist-

ing

regulatory

action or

machinery

might

be

accompanied by

a

minimal

accretion

to the

regulative

bureaucracy.

It

seems

quite

possible

that

merely

a

serious,

for-

malized threat

to

control

industrial

prices

and wages would act in the sameway that

the

threat

of

anti-trust

prosecution

has

acted to restrain

collusion

and

perhaps

concentration. An

omnipresent

figure

rather than

a

host

of

controllers

might

well

suffice.

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