Since the end of World War II, numerous changes have occurred within the utility industry. During the 1970s, energy policy was largely determined by increases in the cost of fuel. Conservation and environmental initiatives were then continued throughout the 1980s. In recent years, the energy practices of the past have been reexamined. Advances in technology and federal law led to the deregulation of several utilities. For people living in the state of California, this may mean less expensive electricity.
Most industrialized countries depend primarily on oil and natural gas for their energy needs. In the United States alone, these two commodities account for roughly 67 percent of all energy consumed. However, these energy sources are depletable and nonrecyclable (Tietenburg, n.g., pp. 153-1985). In recent decades, energy shortages have caused widespread public concern. Consequently, considerable attention has been focused upon such issues as the pricing and allocation of exhaustible energy supplies (Baumol et al., n.g., pp. 138-151).
A production function may be defined as "the process by which inputs or resources such as labor and capital are transformed into output" (Howe & Rasmussen, n.g., p. 15). Essentially, the production function gives the maximum quantity of output that can be obtained through various input combinations. With public utilities, the production function is associated with three technological circumstances. For one, the producer is physically connected to the consumer. Second, consumption and production of the utility service can occur at the same time (e.g., as with electrical utilities). Third, there is a low marginal rate of technical substitution of capital for labor. Both economic and political institutions can potentially allocate energy resources in an efficient manner. For example, an ideal futures market for some scarce resource might produce current prices that accurately reflec...