Regulated Utilities and Equipment Manufacturers' Conspiracies in the Electrical Power Industry

E. David Emery

Bell Journal of Economics, 1973, vol. 4, issue 1, 322-337

Abstract: The paper demonstrates that only with some form of reproduction cost valuation for rate base capital is it possible that the regulatory process might encourage electrical utilities to cooperate or acquiesce with a manufacturers' conspiracy to increase equipment prices. Based on the process function for steam-electric generation developed in the paper, a monopolistic utility subject to rate-of-return regulation using original cost valuation will always have a more profitable alternative than paying conspiratorially inflated equipment prices. Empirically, the acquisition prices for steam-electric generating units purchased by utilities were higher during a "conspiracy" period, 1956-1959 than during the adjacent years, 1954-1955, 1960-1961. Although the statistical results were somewhat ambiguous, it could not be concluded that the type of rate-base valuation scheme applicable to each utility made a significant difference either in the level of prices or in the increase in prices for similar generating units.

Date: 1973
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