Dynamic Regulatory Distortions: Coal Storage at U.S. Power Plants

104 Pages Posted:

See all articles by Akshaya Jha

Akshaya Jha

Carnegie Mellon University

Date Written: February 7, 2019

Abstract

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

Jha, Akshaya, Dynamic Regulatory Distortions: Coal Storage at U.S. Power Plants (February 7, 2019). Available at SSRN: https://ssrn.com/abstract=

Akshaya Jha (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
4
Abstract Views
12
PlumX Metrics