the effect upon small business1 of the promotional practices of utilities. As the letter states with reference to the questionnaire: This information will enable the Subcommittee to more accurately assess the nature, dimension and effect upon small business of current promotional activities used in connection with the marketing of the several sources of energy. As you may also have observed, however, the questionnaire, while requesting voluminous information respecting the promotional allowances programs of utili ties, asks no questions as to the effect on small business of those promotional practices. In view of this, it would plainly seem to advance the interests of the Subcommittee and to assist it in arriving at fair and impartial conclusions from its investigation, for member companies, in responding to the questionnaire, to provide the Subcommittee with factual information and statistics designed to show the extent to which small businesses (as defined) within the utility's service area actually benefit or derive advantage from its promotional programs and increased energy loads. This is the substance of the suggestion evolved in the EHA Board. We recognize, of course, that the questionnaire does not specifically call for such data, but have no doubt, in view of the announced objectives of the Subcommittee, that its receipt would be welcomed as an aid in the accomplishment of the Subcommittee's indicated purpose. It is believed, moreover, that the factual information here envisioned is reasonably available within the member companies. It would involve data as to the estimated (the figures need not be precise) number of small business firms, the employment provided by them (stated, perhaps in terms of estimated number of jobs), the estimated annual dollar volume of business which they do as an adjunct or supplement to the sales of electric energy within a given service area. There might well be embraced separate figures as to builders or developers, electrical contractors, appliance dealers, equipment suppliers, promotional and advertising media, underground installations, etc., etc. It is further requested that those utility companies adopting this suggestion and compiling this kind of data, whether to provide it to the Dingell Subcommittee or otherwise, please be so kind as to furnish a copy thereof to the under signed at the EHA office. This will permit of the general compilation of these data for the information of our members and possible other additional uses in the future. Very truly yours, Enclosure. JOHN H. K. SHANNAHAN. P.S. A simple one page form is attached, it would be most helpful to us in helping you if you could supply as much of the indicated data as possible. Report of small business' participation in development of the electric heating Reporting utility:. market Number of electric heating installations: Residential (as of Dec. 31, 1966). Commercial (as of Dec. 31, 1966). We estimate that the following number of small business firms are participating in the electric heating market. 1 In Washington a "small business" is one with not more than 500 employees or, in the case of construction contractors or subcontractors, those with not more than seven and a half million dollars of business per year. In Washington a "small business" is one with not more than 500 employees or, in the case of construction contractors or sub-contractors, those with not more than $7,500,000 of business per year. Return to Mr. John H. K. Shannahan, Vice President and Executive Director, Electric Heating Association, Inc., 750 Third Avenue, New York, New York 10017. APPENDIX C-2 TABULATION OF RETURNS Report of small business1 participation in development of the electric heating market Estimate of the number of small business firms participating in the electric heating market: The survey responses represent approximately 10% of the residential electric heating installations. As this is a satisfactory sample, we can project the findings to the national level: 172,000 small business firms active in electric heating. MISCONCEPTIONS AS TO UTILITIES' OPERATIONS The intent of this Appendix is to offer information that will help clarify apparent misconceptions of utilities' operations as reflected in testimony of previous In Washington, a "small business" is one with not more than 500 employees or, in the case of construction contractors or sub-contractors, those with not more than $7,500,000 of business per year. witnesses before the Subcommittee.' This Appendix is submitted in the interests of elemental fairness to utilities. Several witnesses before the Subcommittee have claimed, in effect, that sharp distinctions exist between utilities and non-regulated businesses with respect to expenses of selling. Essentially four distinct propositions have emerged from this testimony: 1. Utilities are a "monopoly", 2. With a "guaranteed" return, 3. Which, unlike non-utility business enterprises, are hence able to expend enormous and/or unlimited amounts for advertising and sales promotion because, 4. The cost thereof is charged to or paid by each and every of the utility's rate-payor-customers. TODAY'S UTILITIES NOT "MONOPOLIES" In its most fundamental concept, a "monopoly" is a business enterprise with power to fix or control prices or to exclude competition." "Monopoly or monopoly power" is generally defined as the power or ability to fix or control prices in the market or the power or ability to exclude competition from the market." 4 Electric utilities possess neither of these powers: They may not control or fix prices because their prices or rates for electricity are set by the state utility commission which regulates them (except for the four states which have no commissions regulating electric utilities). Hence, and self-evidently, it is the regulatory commissions who both control and fix the consumer prices for elec tricity-not the utilities. Nor do electric utilities have the power to exclude competition. To the contrary, as these Hearings demonstrate, the most intensive kind of competition exists between the various sources of energy. As is stated by Professor Bonbright in his "Principles of Public Utility Rates": "True there seldom exists that primary form of competition illustrated by two electric companies vying with each other for patronization of the same customers. But what does exist is the competition of the substitute service or products. For many purposes the use of electricity is alternative to the use of gas, oil or coal. Moreover, the large industrial and commercial customer has a feasible option to produce his own electricity if the power company will not quote him a favorable rate. It follows that the traditional distinction between monopolistic public utilities and competitive free enterprise is an oversimplification, since the true distinctions are those of degree rather than of kind." " ... Since Bonbright was written, total or "gut" competition has become a preva lent fact of energy marketing life. Today, "total energy" installations, fueled by oil or gas, can remove major apartment complexes, shopping centers, etc.. as customers of electric utilities--even for electric lighting. As long ago as 1934, the U.S. Supreme Court recognized not only the existence of competition as to franchised services but also the need for the franchised company to engage in advertising and promotional expenditures to cope with it: "We take judicial notice of the fact that gas is in competition with other forms of fuel, such as oil and electricity. A business never stands still, it either grows or decays. Within the limits of reason, advertising or develop ment expenses to foster normal growth are legitimate charges upon income for rate purposes as for others." " This statement by Justice Cardoza is even more pertinent today than it was 34 years ago, for the inter-energy competition has greatly intensified. 1 Statements made by Committee witnesses as appears at the following: Witness Hall (NOJC), page 27. Witness Godwin (NOJC), page 40. Witness Giberson (NOJC), page 66. Witness Mutter (NAPHCC), pages 32, 131-132. Senator Edward Kennedy, page 123. Witness Horovitz (NAPHCC), pages 152-153. Witness Estabrook (Mechanical Contractors Assn.), pages 471, 473-474. 2 Report of the Attorney General's National Committee to Study the Antitrust Laws and Supreme Court Cases it cites at page 43; of also Webster's Unabridged Dictionary. 1 CCH Trade Regulation Report. p. 2652. Page 37, Summary and Tabulation of information submitted by the State Utility Com missions to the Subcommittee on Intergovernmental Relations of the Committee on Govern ment Operations, U.S. Senate, 90th Congress, first session, Committee Print of September 11, 1967. 5 Pp. 18 and 10. 6 West Ohio Gas Co. v. Public Utilities Commission, 294 U.S. 73, 72. Commissioner Black of the Federal Power Commission has also recognized the evolutionary change contemporary competitive conditions dictate in the traditional role of utilities as "monopolies": "The orthodox view that gas and electric utilities are natural monopolies, subject to regulation of one form or another and therefore assured at least the opportunity to make a profit, is becoming more and more out of date. It is true that the regulated utility companies are in the narrow sense 'monopolies'; and in the earlier days of these industries, the different meanings to be attached to the terms 'monopoly' and 'competition' were not so significant. Regulation, at least theoretically, protected both the utility and the consumer-the utility from 'competition' and the consumer from exploitation by the 'monopoly'. But this was in the days before vigorous interfuel competition had made itself strongly felt. This is a type of competition that utility regulation should not seek to eliminate. To the extent that the pressure of inter-fuel competition intensifies, the 'monopoly' status of the utility diminishes in a very real sense. The utility may no longer have the assurance of earning a profit, and competition takes over at least some of the functions and regulations." (Emphasis supplied)' We recognize, of course, the normal characteristic of most utilities as that of being limited or restricted to selling electricity only in precisely designated territories or service areas. This, however, is a restriction or limitation of territorial bounds and per se does not warrant the characterization of an electric utility as a "monopoly". UTILITIES' "RETURN" NOT GUARANTEED No utility is the beneficiary of a guaranteed return." This simply is not so. The state regulatory commissions, in fixing electric rates to be paid by the consumer, do not and indeed could not, attempt to guarantee the utility that the subsequent sales revenues yielded by such rates will provide the company with a guaranteed "return" or profit. Previous testimony to the Subcommittee suggests (1) that a utility is guaranteed a return on its operations and (2) as a consequence, any funds expended by a utility for advertising and promotion can be passed along to the consumer in the form of higher rates. The facts are, however, that no utility is the beneficiary of a guaranteed return and that any amount spent on advertising and promotion by the utility above that which a Commission found to be reasonable when setting its current rates must come out of the revenues generated by those rates. Rates are prospective; they are predicated upon past fact and future estimates, and current rates may not be changed without Commission approval. Thus, a rate which, at the time it was fixed by the Commission, was set at a level to generate future gross revenues sufficient (1) to pay all of what the Commission then found to be reasonable operating (including sales) expenses, including depreciation and taxes, and (2) to yield a fair return to the utility on its investment in its facilities devoted to public service, will not generate sufficient revenues to do both if, for example, the operating expenses actually incurred by the utility after the time the current rate was fixed exceed those upon which the Commission acted in setting the current rate. In such event and assuming all other factors upon which the current rate was predicated remain constant, it is the "return" portion of the gross revenues that are generated by an existing current rate which suffers. Accordingly, while a utility has an opportunity to earn a fair return on its investment under the current rate established by the Commission, neither the Commission nor the management of the utility can guarantee that a "fair" return or any return will, in fact, result from that rate. Indeed, the actual "return" that will result to the utility from that rate may be more or less than that which figured in the setting of the rate, depending upon the utility's efficiency, the state of the economy, the cost of capital, etc. Speech before American Public Gas Assoc., October 8, 1965. The Subcommittee has previously been advised that all electric utilities do not even have an exclusive franchise to sell electricity in a specific service area. The letter of Cleveland Electric Illuminating Company to Congressman Dingell dated April 10, 1968, advised that while that company serves some 132 Ohio communities, it does not have an exclusive franchise to render electric services in any of them and that 36% of the electrical energy consumed in its service area is furnished by others. The phrase "rate of return" (which accurately refers to the percentage applied to the "rate base") is frequently but mistakenly used here. The proper term is "return" (referring to that dollar amount the utility is given opportunity to earn (being the result of applying the "rate of return" (percentage) to the "rate base" (investment). 91-056 0-69-57 Where, for example, advertising or sales expenditures or other expenses exceed those that the utility estimated it would need to spend when the current rate was set the utility cannot earn the full amount of the permissible return. And in this circumstance, since a diminution of the Company's profit is created, the effect is that the enlarged disbursements-unrecovered by offsetting efficiencies elsewhere-are at the expense of the stockholders of the utility-not the rate payers. For, just as with non-regulated business enterprises, profit or "return" results only when and to the extent that, operating expenses are less than operating revenues. If the "return" is less than that found to be "fair" when the rate was set, it is the stockholder (not the rate payer) who suffers, for the utility cannot retroactively raise its rate to make up for increased operating expenses. Because rates are prospective and because they may not be changed without Commission approval, it is erroneous to assert that a utility may spend whatever amounts it pleases on advertising and promotion and still receive a guaranteed "fair" return on its investment. When, in setting electricity prices, a Commission establishes a "rate of return" at say, 6%, it does not and cannot guarantee the utility that it will have future profits at that rate or at any rate of return on its investment. At most, the Commission is saying that, if its figures and reasoning are correct, the prices it approves are such as to, in its opinion, afford the utility an oppor tunity to earn a return of 6% on its "rate base" or investment. The company may thereafter actually earn more or less, depending on the efficiency of its management, the state of the economy, the cost of its capital and all of the same myriad factors which affect the success-or lack of success of every business enterprise-including those of complainants. UTILITY OPERATING EXPENSES ARE CONTROLLED NOT ONLY BY THE SAME CONSIDERATIONS AS IN ANY OTHER BUSINESS ENTERPRISE BUT ALSO BY STATE COMMISSIONS Exactly like any other business enterprise, small or large, amounts utilities spend on advertising and sales promotion are subject to the same inherent limiting elements and considerations respecting their nature and amount. In a word, they are, within applicable limitations of law and policy, a matter of manage ment judgment. The nature of promotional programs settled upon are, of course, determined by local market conditions including the kind of competition being experienced and the nature of the particular service involved, and the type of customer or market. And just as in the case of non-regulated businesses, such expenditures when charged against revenues operate to decrease the utility's return of profits available for dividends to the owner-shareholders. There is no way for a utility to charge rate payers that amount of their promotional expenditures which exceed the amount the regulatory Commission found reasonable when it set the current rate or price to the consumer. Just as in the case of non-regulated businesses, when the price of the product or service is set-the price of electricity being set when the rate is determined by the state commission and the price being set by unregulated companies when their price lists are determined-there is necessarily included a budget for adver tising and promotion. And in both categories of business enterprises, whether the amount so "budgeted" for advertising and promotion is subsequently increased or decreased through the advertising and promotion disbursements ac tually made, such change has a direct effect on the company's overall profit. Indeed, the utilities, because they are such closely regulated industries, are subject to more "checks and balances" surveillance and limitations with refer ence to the "reasonableness" 10 of the amounts they expend for advertising and promotion than are non-regulated businesses, wether large or small. These additional checks peculiar to utilities include: 1. At the time utility's rates are determined by state commissions, its management estimates and projections of advertising and promotional expenses have to be justified. They are reviewed by the commission for "reasonable ness" and if not fully justified may be adjusted downward." 2. Utilities must file regular periodic reports of revenues and expenses with the regulatory commission. Many commissions require monthly reports, others less frequently but all at least annually. And the commissions may 10 "Reasonableness" is always a question of fact determined in the light of all the pertinent facts and circumstances of each particular situation. Usually, any objectants, like complainants here, have a right to be heard in all these proceedings. Indeed they have been initiating many of them. |