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put the larger eggs of plants of greater capacity. Large areas of the country are now supplied with power from interconnected systems operating in parallel, so that the power being generated at any one time can be produced by the lowest-cost combination of facilities. Systems which by themselves could not economically utilize or justify the risk of a superplant can thereby install such a plant as a joint operation, with all participating systems reaping the benefits.

Larger size, in addition to making possible lower capital 91 costs, also contributes to lower operating and maintenance costs. The number of men required to operate and maintain a generating unit, for example, is almost independent of size, so that labor cost per unit of output declines as size increases. To the cost-size relationship the industry has added the results of improved efficiency through such developments as higher temperatures and pressures in generation, improved insulation, new materials and advances in design in transmission. The quantity of coal needed to produce a kilowatt-hour in 1966 was less than one-third of what it was 45 years ago (see Chart 6).

The result of this combination of economies of scale and

technological progress has been a dramatic decline in costs. Chart 7

91

Operating and maintenance expense includes labor, materials, overhead and other expenses incurred in operating and in preserving the operating efficiency or physical condition of utility plant.

7

4

3

CHAR 7

0

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shows the production expenses per kilowatt-hour sold, in current dollars and in constant dollars, the latter eliminating the effects of inflation. The strength of the economies of scale and of technological advance can be fully appreciated when it is realized that even in current dollars the cost of producing a kilowatt-hour of electricity was less in 1966 than it was at the end of World War II, despite the general inflation experienced by the economy during this period. The deflated cost, which eliminates the effect of inflation, has declined almost uninterruptedly from the wartime high in 1944, and in 1966 was only 52 per cent of the

1944 level.

Just as the growth in total power consumption shows no sign of slackening off, so the economies of scale and technological progress give every indication of potential for further exploitation. Economies of scale are even greater for nuclear plants than for conventional fossil-fueled plants and as nuclear power plants become an increasingly important source of power, growth in the demand for electricity and the larger scale of operations it makes possible will continue to have a significant restraining effect on upward pressures on costs resulting from inflation and increased interest in "reliability"

and "environmental quality. This allows an important prognosis: continued realization of the economies of scale will in some degree offset inflationary pressures on the cost of producing electricity and thus make it possible for rates either to increase less than the rise in

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the average price level or to decline. This result is, of course, attainable only if utility managements can conceive and institute pricing poli

cies which will stimulate and take advantage of the growth in demand.

B.

Competition Between Electricity and the Fuels

Although there has always been competi-
tion between electricity and the fuels, in
recent years it has changed in nature and
intensity. The fuels and electricity are
invading each other's markets, with the
result that consumers are now being of-
fered choices and rates not hitherto avail
able.

With this background we turn to the subject of competition between electricity and the fuels (which we shall refer to by the shorthand term of "interfuel competition"), and consider the implications for utility pricing. Let us consider first the situation at the beginning of the century. At that time coal was king: it accounted for almost three

quarters of all energy consumption. The remainder

which accounted for about one-fifth of the total

-

-

excluding wood,

was divided about

equally among crude oil, natural gas and hydroelectricity. Oil and gas were lighting fuels, mostly. Total electricity consumption amounted to less than 10 per cent of all energy consumption; most of this was in industry, since electricity was available for home use only in cities and towns, where it was used mainly for lighting. Transportation was also coal-based in the sense that the bulk of the ton-miles was hauled