Concept Behind Deregulation

It is impossible to address this question without referring to the impact that deregulation of a public utility has had recently in California. The concept behind all deregulation is simple, and one that is based on free market equilibrium. With a level playing field, all entrants would stand an equal and a fair chance, and the customers would be the beneficiaries, usually in terms of better service at lower prices. Such was the scenario envisioned by the California legislature in 1996, when the electric utilities were deregulated, and the free market was allowed to be "free." It is impossible to predict what the outcome of the California situation will be; but even the most optimistic observers cite the need for re-regulation, and the prospect of the State of California becoming the supplier of last resort for the energy that is needed to allow this state to continue to thrive. With the benefit of hindsight, it is easy to chart where the vision became blurred, and where the mistakes were made.

Until deregulation of public utilities, profits were limited by regulation and managers were not under pressure to maximize either shareholder profits or customer satisfaction. Customers were generally limited to a single provider of utilities within a given geographic region, and thus could not exercise economic pressure on providers to improve service, decrease prices, or otherwise focus on customers' satisfaction. Now, in an increasingly deregulated e

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hareholder value (Donlon & Gutfreund, 1998, p. 50). Shareholder value is typically enhanced by management focusing on the financial statements and improving the ratios and relationships between the critical factors on the financial statements. On the balance sheet, for example, a company might seek to lower its indebtedness or increase its asset base. It might focus on reducing its accounts receivable collection period so that its cash balance increases and the amount allotted for bad debt decreases. If the company is able to reduce its accounts receivable collection time so that it is less than the industry as a whole, the financial markets are likely to look favorably on this and drive up the share price (Birnbaum & Winter, 1995, p. 10A). In the case of Precision Dynamics, management has found a great deal of satisfaction following the precepts of Economic Value Added (EVA). EVA is not the only single measure of corporate performance, but it does provide a rational method to enable investors and shareholders to identify financial stability while at the same time motivating managers to make value-added business decisions? Obviously, this is a question of utmost importance to investors, managers, and business researchers. E

Category: Economics - C