-70 by the Class I customer would not cover fully-allocated cost and it would follow that the rates charged some other class (or classes) of customer (Class II) would exceed the costs allocated to it (Class II). It would not follow, however, that the rates charged Class II would be "inequitable." For its rates would actually be lower than if all customers were charged fully-allocated costs, since by charging Class I customers less than "full costs" there resulted a net revenue increase which was applied against Class II's rates. Thus, "fair" (rate = cost) treatment of a class of customer may result in higher rates to that class than so called "un fair" (rate greater than cost) treatment. The rates that would meet these criteria cannot be calcu lated with precision. They can, however, be approached on the basis of experienced judgment and analysis, and through testing and experimentation, all under the scrutiny of the regulatory agencies. E. petitive rates. Competitive Allowances Competitive allowances, like competitive tive rates. Much of the controversy surrounding the new competition in the energy markets arises from competitive allowances rather than comOne commission has, for example, called payments to builders to install one or another kind of heating equipment a form of -71 "payola. " 37/ There is, after all, a long regulatory tradition of opposition to rebates and similar payments -- a tradition reflected in most statutes governing utility operations. A brief listing of these controversial allowances and practices would include advertising cost-sharing programs, construction and installation cost allowances, sales bonus programs, financing assistance, equipment and appliance rental programs and such activities as lending company personnel for showing houses. 38/ They are, in good part, what economic theory has long recognized as "nonprice competi39/ tion. " It might be well at this point to consider two suggestions. surrounding competitive practices. These practices are, after all, 371 38/ 391 Carolina Power & Light Co., 52 P.U.R. 3d 469, 484 (North See, e. g., "One View of Promotional Activities of the Utili- See Richard B. Hefle bower, "The Theory and Effects of Non- -72 elements of a sales program. They involve certain costs. Let us, the say that "selling costs encompass all outlays designed to persuade buyers 40/ to purchase from one supplier rather than from others....". Thus, for example, payments to a builder for installation of electric heating should be treated for accounting purposes as advertising expense and included as a cost element in the complete incremental cost computation which would underlie an electric space-heating rate. It is our understanding that this is now common practice. Also, this treatment -rather than a simple outlawing of the practice would require sys - tematic reporting by the utility of all competitive practices, so that regulatory bodies could judge the propriety of the cost assignments associated therewith. There seems to be no objection to such reporting: in order to insure that managerial discretion is not abused, it is appropriate for the Commission to be fully advised of the promotional 41/ activities of utilities.". Second, it should be recognized that the use of indirect price competition is a not-uncommon form of rivalry. A survey of 200 successful, well-managed manufacturing companies (as listed in 40/ 41/ Ibid., p. 186. Brief for Defendant Virginia Electric and Power Co., Commonwealth of Virginia v. Appalachian Power Co., et al., No. 17889 (Virginia State Corporation Commission, filed September 1, 1966), p. 34. -73 Martindell's Manual of Excellent Management) indicated that one-half did not regard "pricing" as one of the five most important sources of 42/ Product R&D, sales research and planning, their firms' success. management of sales personnel, advertising and service were all con sidered of greater importance than pricing. It is unlikely that the energy market, increasingly competitive as it now is, can be converted into a unique economic phenomenon - one characterized by direct price competition only. This does not mean, of course, that all competitive practices should be permitted. For example, guarantees (to the consumer) of maximum cost have generally been disapproved by state commissions. It does mean, however, that the estimated costs of the permissible competitive practices should, to the extent they can be determined, be included in the complete incremental cost computation. The net effect of the above suggestions would be as follows: utilities would be permitted to engage in almost any competitive activity 43/ they desired, these activities would be reported to the state 42/ 43/ Jon G. Udell, "How Important is Pricing in Competitive A recent paper by a leading economist argues persuasively - continued -74 commissions in detail, and the costs thereof would have to be reflected in the rate in question. The problem arises, after all, only because a utility's competitors allege that the utility can recoup the cost of competitive efforts by "overcharging" other, captive customer or service classes. Yet if all competitive costs are reflected in specific utility rates, and if, despite this, a utility seems to win the competitive battle, its competitors have no legitimate economic basis for complaint. There remains, of course a certain uneasiness which is system. felt about these payments when they are made to the builder, rather than to the ultimate owner of the home. This concern is apparently rooted in the notion that the payment will induce the builder to install a heating system he knows will cost more to operate than an oil or gas But note that this assumes that the builder is not forced, by competitive circumstances, to pass on to the buyer his cost saving. Normally, cost reductions in manufacturing are passed on to ultimate consumers through various middlemen. The price of some meat product is reduced by a packer; retail sellers, knowing they face competi tion from each other, pass these savings along - out of necessity, not on Inducements for Superior Performance Under Regula- |