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Electricity accounts for about 25 percent of the total energy consumed in the United States and its share of total consumption has been increasing slowly. In an effort to decrease the vulnerability of the United States to foreign energy price increases and embargoes, Federal energy policy, particularly as formulated in the Federal Energy Administration Report for Project Independence, would accelerate this trend towards electricity. These policies call for the mandatory conversion of household and commercial heating to electricity and the conversion of oiland gas-burning plants to domestically available coal and uranium. Even without such mandatory controls, consumers may choose more electricity as a result of increases in fuel oil prices relative to electricity prices, or as a result of the shortage of natural gas, or because electricity supply seems more secure. Although Federal policies and consumer choice may shift demands towards electricity, there is no assurance that the additional quantities and mix of generating capacity desired will in fact be forthcoming. The nation's investor-owned utilities (providing over 90 percent of generating capacity) are not likely to be able to raise the required amounts of capital. Increases in construction costs, fuel costs, and interest charges have recently outstripped revenue growth, and expectations that this trend will continue have made utility investments unattractive. The suspicion is that regulatory procedures have recently caused price increases to lag behind cost increases, resulting in earned rates of return below the cost of capital. If this continues, capacity to meet increased demands-and Project Independence, in whatever form-will not be achieved. The purpose of this paper is to assess the financial prospects of the nation's electric utility industry, given existing regulatory institutions and continued high rates of growth of demand in the late 1970's. Shortages from regulation would indeed be a turn of events. Economists' analyses of regulatory effects in the 1960's deplored the behavior of commissions on the grounds that they did nothing to control prices (see G. J. Stigler and C. Friedland and R. Jackson). However, the turn of events would not be entirely surprising; using the behavioral approach in analyzing regulation leads one to suspect that commissions operate relatively independent of economic conditions (see Joskow, 1972). The well-established operating rules of the bureaucracies change only when the results of such procedures under inflation or depression become intolerable (see Joskow, 1974). What may have been ineffective regulation in the 1960's may be overzealous regulation for the late 1970's.
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