Cogeneration—Road to Competition

Virtually unnoticed in President Carter's voluminous energy plan is a brief endorsement of "cogeneration." This term refers to the production of electricity from steam used in industrial processes. As such, it is a form of recycling—making use of heat energy that would otherwise be wasted as thermal pollution. Cogeneration is not new. At the turn of the century most industrial plants generated their own electricity from steam, though only 14 percent were still doing so in 1974. Why? Largely because decades of governmental cheap-energy policies, especially natural gas price controls, had made purchased electricity less expensive than byproduct electricity.

But times are changing. In a recently completed study for the American Enterprise Institute, Prof. Edward J. Mitchell and a group of colleagues (including Alan Greenspan) found that expanded use of cogeneration could be exceedingly beneficial. Cogeneration appears to be economically feasible for 43 percent of all industrial plants. In such plants installation of modern cogeneration equipment could not only make the plant self-sufficient in electricity, but also enable it to become a seller of electricity—either to other industries or to the local utility. If the larger firms installed cogeneration capacity 20 percent above what was needed for their own electrical needs, a total excess capacity of 57,000 megawatts could be available in 1980—which is over half the electricity expected to be needed by all industry in that year. By 1985 such systems could be saving 680,000 barrels of oil per day.

Why aren't firms rushing out to purchase cogeneration equipment? The AEI report cites the regulatory structure under which the utilities must operate—state regulation, the Federal Power Act, the Public Utility Holding Company Act, antitrust laws, and tax codes—and suggests revising them to remove these institutional barriers. Several companies are geared up to supply cogeneration hardware, including Thermo Electron Corp. and Sunstrand Corp. Both Pacific Gas & Electric and Southern California Edison have recently agreed to purchase surplus power from industrial cogeneration plants being built in California.

But the most exciting aspect of cogeneration, beyond the vast energy savings, is its potential for introducing competition into the electricity market. Prof. Mitchell notes that widespread cogeneration "would result in a proliferation of independently owned power sources, operating at costs significantly lower than those of the present regulated utilities." This, of course, runs "directly counter to the assumptions that have always governed utility policy—namely, that utilities are natural monopolies and that regulation is essential.…" Thus, if specific regulatory barriers can be removed, cogeneration may well knock the props out from under the entire justification for public utility regulation, returning this "natural monopoly" to the competitive marketplace.

Toward Economy in Electric Power, Edward J. Mitchell and Peter R. Chaffetz, American Enterprise Institute, 1975 ($2.00)
• "Saving Energy the Cogeneration Way," Business Week, June 6, 1977, p. 99

Air Bag Opposition

In the face of Transportation Secretary Brock Adams' decision to require air bags on all new cars, strong opposition has been developing. As set forth many years ago in REASON (see "Is 'Inflation' Good for You?" by Brock Yates, March 1971), air bags are costly, ineffective, and potentially hazardous.

The costs include not only the initial cost—ranging from $193 (G.M.) to $250 (Chrysler)—but the additional fuel consumption due to 50 lbs. of extra weight, the cost of maintenance (to keep the system in working order), and replacement of the bag and repair of the interior in the event of actual bag inflation. Rep. Bud Shuster of Pennsylvania estimates that the typical motorist will pay $2000 more over his driving life if air bags are installed on all cars.

More serious than the dollar costs are the hazards of air bags. To begin with, the bags offer protection only in frontal crashes, and then only if the car's speed is over 22 mph. Yet side impacts, rear-enders, rollovers, etc. account for 45 percent of all traffic fatalities. If people cease using lap/shoulder belts, thinking air bags will protect them, the number of fatalities is bound to rise. The National Highway Traffic Safety Administration has released figures showing that lap/shoulder belts are 5.5 times better at saving lives and 2.5 times better at preventing injuries than air bags. But NHTSA claims people don't use the belts. They base this claim on shopping center surveys that showed only 20 percent buckling up. But Dr. Howard Goldmuntz, researching accidents under federal contract, found that belts were in use in 44.2 percent of the 1975 cars involved in accidents. Out on the road, as opposed to in parking lots, people are buckling up. Goldmuntz has calculated that at the 1975 voluntary rate of belt usage, 30 percent more lives would be saved than by use of air bags.

All of this neglects perhaps the worst hazard of all: accidental inflation, leading to possible loss of control of the car. So far, of the 11,000 cars equipped with air bags from 1973 through 1976, some 7.3 percent of all air bag inflations have been accidental. Rep. Shuster predicts 30,000 accidental inflations per year if all U.S. cars were air bag equipped.

Consequently, congressional opposition to Adams' mandate is rising. Shuster and Rep. Steve Symms are sponsoring a bill to overturn the plan. So far they have 150 sponsors. The Wall Street Journal has also endorsed their efforts. Hopefully, this new dose of governmental paternalism will go the way of the hated interlock/buzzer scrapped by Congress three years ago.

• "The Half-Safe Car," Wall Street Journal editorial, July 20, 1977.
• "Air Bag Fiasco Endangers Lives," Steve Symms' Washington Report, July 24, 1977.

State Gambling—A Lousy Bet

The State tends to foul up most of the things it gets involved with. It should come as no surprise, then, that a $76,000 federal evaluation of State-operated gambling concludes: "No one but a fool would gamble with State-run gambling operations." In point of fact, state lotteries are limited by statute to paying out only 40-45 cents on the dollar. Illegal numbers games pay out 60-70 cents, while slot machines pay 75-95 cents and sports bookmakers pay about 95.5 cents on the dollar, reports G. Robert Blakey of Cornell, who directed the study.

Other critics note further that local numbers operations provide much better service to customers than do state lotteries. The numbers pay off within a day or two, not weeks later as with the lottery. The numbers can be played on credit, unlike the lottery. Numbers can be played for as little as a penny, and nickels, dimes, and quarters are frequently bet. Most state lotteries require 50 cents or a dollar. And of course, numbers winnings are generally not reported as income and are therefore not taxed.

As of now 13 states operate lotteries or other forms of gambling, attempting to compete with the black market. And 15 others will join the fray by 1980, predicts the Public Gaming Research Institute. State officials expect to sell about $2.2 billion worth of tickets this year. Yet lotteries and other State-run gambling operations contribute only marginally to raising revenues. The largest percentage of any state budget derived from gambling revenue is New Hampshire's 2.44 percent. State-run gambling seems to be a dubious intrusion of the State into yet another area better left to the marketplace.

• "Study Calls State Lotteries a Bad Bet," AP (Washington), May 23, 1977.
• "The States Muscle In on the Numbers Game," Business Week, May 9, 1977, p. 113.
• "Numbers Game: 'You Try to Survive,'" Robert Daniels, Cleveland Plain Dealer, May 4, 1977.

The Right to Run Your Business

In recent years antitrust laws and court decisions have usurped more and more of management's decision making authority. Increasingly the government tells people how to run their businesses. Against this backdrop, two recent court decisions stand out in marked contrast.

In the first case, the U.S. Supreme Court ruled 7-2 that manufacturers are free to specify the locations at which their products may be sold by franchised retailers. The decision overturned the 1967 ruling that made such restrictions on retailers a per se violation of the Sherman Act. The case arose from a Sylvania Corp. marketing strategy to limit the number of dealers in a given area handling its color TV sets, and to require them to sell only from locations authorized by the company. In the court's decision, Justice Powell stressed that such restrictions, far from being anti-competitive or anti-consumer, tend to promote competition among brands and induce retailers to provide adequate service and repair facilities.

The second decision occurred in a federal jury trial in Midland, Texas. The jury there ruled that the Adolph Coors Company may legally restrict its beer sales to those distributors it finds acceptable. For the past several years certain distributors have been attempting to sell Coors beer beyond the 14 western states where the company prefers to sell. Coors' unpasteurized beer must be kept refrigerated, and the company exercises close supervision over its distributors in order to assure quality control. For this reason it has sought to limit its sales territory to the West. In 1973 the Federal Trade Commission had ordered Coors to halt its efforts to restrict unauthorized eastern distribution, terming these actions "price fixing." The Texas decision overturns this ruling, restoring to Coors the right to run its own business.

• "Top Court Says Producers Can Pick Sales Sites," Washington Post, June 24, 1977.
• "Coors Apparently Wins Right to Control Sales," Wall Street Journal, July 11, 1977.

Costly Minimum Wage

Economists have long pointed out that laws requiring payment of a minimum wage are another form of price control, and therefore produce the expected consequences of such controls: shortages. Setting a minimum price for labor creates a shortage of jobs for those whose labor is worth less than the minimum—typically those with little or no skills or experience (which today frequently means minorities and especially teenagers). The administration's proposed increase in the minimum wage to $2.65 as of January 1 (with built-in inflation increases) is no exception.

Under the administration's plan, the minimum wage would rise to 52 percent of the average hourly manufacturing wage within a year. That would put it over $3 per hour by the start of 1979. According to a study by the U.S. Chamber of Commerce, if a $3 minimum wage were enacted now, it would cause an immediate loss of 700,000 jobs by layoffs, and would reduce future employment by 2 million. Carter's earlier proposal for a $2.50 minimum would eliminate 900,000 jobs, while the $2.65 compromise plan would knock off about 1.5 million, both short-term and future. The Chamber's figures are based on a state-by-state analysis of the effects of past increases in the minimum wage. California and New York would be the hardest hit, each losing over 200,000 jobs (in the $3 case).

It is perhaps a sign of the times that even the Carter administration admits that its proposal will cause a loss of jobs. But Labor Secretary Ray Marshall claims the loss would only be 90,000. If the only quibble is over how big the loss will be, perhaps free-market forces have already won a modest victory.

• "$3 Minimum Wage Assailed by C of C," UPI (Washington), May 8, 1977.
• "Minimum Wage of $2.65 Could Cost 90,000 Jobs," Ibid., July 29, 1977.

Truck Decontrol Supported

Shippers are lining up in favor of efforts to deregulate, at least partially, the motor trucking industry. In recent weeks various industrial firms and organizations have begun speaking out, urging substantial loosening up of Interstate Commerce Commission regulations—especially those restricting entry and requiring empty backhauls.

Ten large firms, including Sears, Roebuck & Co., General Mills, and Green Giant, have formed the Committee Urging Regulatory Reform for Efficient National Trucking (CURRENT). (Sears is also a member of the Ad Hoc Committee for Airline Regulatory Reform.) The 1800-member National Industrial Traffic League has also urged substantial deregulation, especially as regards entry to the industry.

In response, an ICC task force has proposed 39 minor reforms that would reduce delays in responding to applications for service, limit the kinds of protests allowable by existing truckers, and exempt more goods and services from ICC regulations. ICC chairman Daniel O'Neal plans commission action on "a lot of" the 39 proposals by the end of September. O'Neal has long been a critic of ICC truck regulation, and has even questioned the need for regulation, per se. But most observers see his present actions as efforts to defuse any serious threat to the ICC's existence.

• "Big Shippers Push for Decontrol of Truck Industry," Wall Street Journal, July 6, 1977.
• "NITL Praises ICC Task Force Report on Motor Carrier Entry," NITL News, July 1977.
• "ICC Chief O'Neal Plans Fast Pace for Reducing Regulation of Truckers," Wall Street Journal, July 18, 1977.

Prison Industries for Profit

Sam Johnson is an apprentice upholsterer. He works an eight-hour day and gets $2.50 per hour, working for Furniture Workshops, Inc. But his workplace is a shop within Minnesota's Lino Lakes prison. Johnson is one of five inmates who is learning a useful trade by working for the private, profit-making company. From his monthly wages he pays $120 to the state for his prison room and board. Furniture Workshops, in turn, leases workshop space in the prison for its five inmate and five civilian employees.

The Lino Lakes experience is part of a revolution in prison industries taking place in Minnesota. Most prison industries are run by the State and "bear little relationship to the outside world," according to a study conducted by Econ, Inc. of Princeton, N.J. In most states work days are only 3-1/2 hours, wages seldom over a dollar a day, assignment to the program depends on good behavior (rather than on ability and interest), and the job skills involved are such useful abilities as making license plates and tending hogs. Moreover, products produced in prisons generally may not be sold on the open market.

All that is changing in Minnesota. In 1974 state law was changed to permit private industry to move into prisons, and the law already permitted sale of prison-made items in the marketplace. A grant from the Law Enforcement Assistance Administration (LEAA) has provided capital equipment for producing such products as rope, farm machinery, and snowmobiles. The Lino Lakes prison also provides metal finishing and assembly work on a subcontract basis to outside firms. Private firms operating from within the prison include companies involved in data processing, cabinetmaking, and auto rebuilding.

LEAA is funding similar (though less ambitious) projects in Connecticut and Illinois. Political pressures in those states have held down prison wages to $2-4 per day, and private firms aren't yet allowed to participate, except as advisors. But the prison industries in both states are being redesigned to be competitive with outside firms in such areas as eyeglass and denture production, tire recapping, and typewriter repair (Connecticut) and auto body work, typesetting, and data processing (Illinois). In both states prison goods can only be sold to state and local governments, so far.

Despite their limitations, the new business-like prison industries in all three states appear to be succeeding in training and motivating inmates—as well as saving taxpayers money via sale of products. If, in addition, they prove effective in rehabilitating inmates, a pressing modern dilemma will be on the way to solution.

• "Where Prison Shops Run Like Businesses," Business Week, July 18, 1977, p. 56.


Return of Midwives. Citing figures showing that only 37 percent of California obstetricians accept Medi-Cal patients, Assemblyman Gary Hart has introduced a bill to legalize lay midwifery. Nurse midwives were legalized in California in 1974, but lay midwifery is still illegal. An estimated 200-300 lay midwives are currently practicing in that state, charging $200-400 compared with $1000-1500 for hospital births. Midwifery was legal from 1917 to 1949 in California, but was subsequently outlawed due to pressure from the medical profession. (Source: "Midwifery Backed as Option for Families," Los Angeles Times, July 21, 1977.)

Free Trade Victory. American consumers won a major victory over protectionism in July. The U.S. Court of Customs and Patent Appeals overturned a New York Customs Court decision that countervailing duties must be imposed on electronic products imported from Japan. That decision, if upheld, would very likely have led to a trade war of major proportions, with countervailing duties being requested on nearly all imported products (see "The New Jingoism," REASON, September 1977, p. 8). The case is not completely closed, however, since Zenith Radio Corp., the original plaintiff, plans an appeal to the Supreme Court. (Source: "Japanese TV Exporters Win Victory," AP (Washington), July 29, 1977.)