ELECTRICAL EQUIPMENT PURCHASING PATTERNS OF UTILITIES AND COMMERCIAL COMPANIES AS AFFECTED BY COLLUSION AMONG EQUIPMENT MANUFACTURERS: AN ASPECT OF RATE-BASE PADDING BY ELECTRICAL UTILITIES

In 1960 Harvey Averch and Leland Johnson examined the issue of overintensive substitution of capital for other factors of production by comparing the capital labor ratio for both regulated and non-regulated firms. They found that the regulated firm will hire too much capital relative to the amount of labor when it has a constraint that allows the return on capital to be greater than the market cost of capital.;In this study I examined only the first form of overintensive use of capital, "gold plating". First, I demonstrated that rate base padding can take place under conditions where padding was previously thought unprofitable. Second, I examined the proposition that utilities failed to secure the lowest prices for certain kind of equipment by comparing the transaction prices of utilities with those of industrial firms. The analysis covers two time periods: (1) the collusion period 1957-1959, which was characterized by collusive agreements among electrical equipment manufacturers, (2) the post-collusion period 1961-1963.;The findings of this study are: (1) For the years of 1957-1959, the period of collusion, the annual regression functions indicate the existence of price differences between the purchases of utilities and industrial firms. The utilities have paid a higher price for the equipment they purchased; Therefore, it is very likely that they padded the rate base. (2) For the years 1961-1963, the post-collusion period, the annual regressions indicate a small and diminishing price difference between the purchases of industrial firms and utilities. Therefore, for period padding the base probably did not take place.;Prof. E. Zajac noted in 1970 that little attention was paid to a much older issue, of possible overintensive use of capital unrelated to the substitution process among different factors of production. Translating the Averch-Johnson hypothesis into geometric form, he was able to examine this issue otherwise known as the "rate base padding". He found that a regulated firm, with the type of constraint mentioned above, will at times find it profitable to pad the rate base by: (1) Gold plating. These are purchases of capital that are unnecessarily expensive. Payments for capital that are above the market price are viewed as additions of non-productive capital. (2) Maintaining excessive capacity. (3) Penetration into other markets at non-profitable prices.