Regulatory Induced Risk Aversion: Coal Procurement at U.S. Power Plants

73 Pages Posted: 29 Jun 2018

See all articles by Akshaya Jha

Akshaya Jha

Carnegie Mellon University

Date Written: June 9, 2018

Abstract

From 1983-1997, U.S. power plants consistently purchased most of their input coal from long-term contracts at prices higher than prevailing spot prices. I show empirically that plants facing higher spot coal price uncertainty pay higher contract coal prices; plants on average trade off a $3.82 increase in expected costs for a $1 decrease in their standard deviation of costs. I posit a new mechanism that rationalizes this plant-level risk aversion: price-regulated utilities express preferences for a lower variance in total cost because regulators are less likely to pass high cost realizations through to the output price paid by consumers.

Keywords: Output Price Regulation, Rate-of-Return Regulation, Cost-of-Service Regulation, Utilities, Commodity Price Speculation, Sharpe Ratio, Coal, Electricity

JEL Classification: K23, L43, L51, L94

Suggested Citation

Jha, Akshaya, Regulatory Induced Risk Aversion: Coal Procurement at U.S. Power Plants (June 9, 2018). Available at SSRN: https://ssrn.com/abstract=2170547 or http://dx.doi.org/10.2139/ssrn.2170547

Akshaya Jha (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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