Dynamic Regulatory Distortions: Coal Procurement at U.S. Power Plants
99 Pages Posted: 21 Feb 2019 Last revised: 13 Dec 2020
Date Written: December 13, 2020
An influential literature posits that introducing market mechanisms to price-regulated industries generates substantial long-run efficiency benefits by removing the incentive to over-invest in capital. The coal storage behavior of U.S. power plants is an ideal setting to empirically assess this claim: coal stockpiles are adjusted far more frequently than traditional forms of capital and regulators treat coal stockpiles as working capital. This paper estimates a dynamic plant-level model of coal procurement, comparing model-based costs across price-regulated plants versus market-based plants using matched difference-in-differences. I find that regulators implicitly subsidize the coal stockpiles held by price-regulated plants; the annual productive efficiency cost of the resulting distortions to coal procurement is 3 billion dollars (11% of coal purchase costs). The majority of this efficiency cost stems from dynamic distortions to the timing of coal purchases rather than static distortions to coal storage levels. This suggests that previous estimates of the impact of price-regulation on the level of capital investment miss the potentially sizable efficiency costs associated with dynamic regulatory distortions to the timing of capital investments.
Keywords: Gold-Plating, Capital Bias, Output Price Regulation, Rate-of-Return Regulation, Cost-of-Service Regulation, Utilities, Industry Restructuring, Working Capital, Investment, Coal Storage, Electricity
JEL Classification: K23, L51, L94, Q48
Suggested Citation: Suggested Citation