When Does Regulation Distort Costs? Lessons from Fuel Procurement in U.S. Electricity Generation
68 Pages Posted: 14 May 2014 Last revised: 12 Dec 2022
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When Does Regulation Distort Costs? Lessons from Fuel Procurement in U.S. Electricity Generation
Date Written: May 2014
Abstract
This paper evaluates changes in fuel procurement practices by coal- and gas-fired power plants in the United States following state-level legislation that ended cost-of-service regulation of electricity generation. I find that deregulated plants substantially reduce the price paid for coal (but not gas), and tend to employ less capital-intensive sulfur abatement techniques relative to matched plants that were not subject to any regulatory change. Deregulation also led to a shift toward more productive coal mines. I show how these results lend support to theories of asymmetric information, capital bias, and regulatory capture as important sources of regulatory distortion.
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