Dynamic Regulatory Distortions: Coal Storage at U.S. Power Plants
106 Pages Posted: 21 Feb 2019 Last revised: 12 Jun 2019
Date Written: April 9, 2019
Most believe that the largest efficiency gains from introducing market mechanisms to price-regulated industries come from long-run changes in capital investment. The coal storage behavior of U.S. power plants is an ideal empirical setting to assess this claim: coal stockpiles are adjusted frequently and are treated by regulators 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. I find that regulators provide price-regulated plants with an artificially high rate of return on the money tied up in their coal stockpiles. Due to this, price-regulated plants store 11% more coal than similar market-based plants, resulting in annual productive efficiency losses of 4.8 billion dollars (roughly 4% of retail revenues). My findings suggest that the largest efficiency benefits from introducing market mechanisms to price-regulated industries stem from steady-state differences in capital levels rather than changes in the timing of capital investments.
Keywords: Output Price Regulation, Rate-of-Return Regulation, Cost-of-Service Regulation, Industry Restructuring, Averch-Johnson Effect, Gold-Plating, Commodity Price Speculation, Optimal Inventory Management, Coal, Electricity, Utilities
JEL Classification: K23, L51, L94, Q48
Suggested Citation: Suggested Citation