Dynamic Regulatory Distortions: Coal Procurement at U.S. Power Plants
104 Pages Posted: 21 Feb 2019 Last revised: 21 Jan 2020
Date Written: January 20, 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 versus market-based plants using matched difference-in-differences. My estimates indicate that regulators provide large implicit subsidies on the coal stockpiles held by price-regulated plants, resulting in annual productive efficiency losses of 3 billion dollars (11% of coal purchase costs). My findings suggest that the majority of the efficiency costs from regulatory distortions to the cost of capital stem from dynamic distortions to the timing of capital investments rather than static distortions to steady-state capital levels.
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