Does Competition Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency

57 Pages Posted: 10 Nov 2004  

Kira Markiewicz

affiliation not provided to SSRN

Nancy L. Rose

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Catherine D. Wolfram

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2004

Abstract

Although the allocative efficiency benefits of competition are a tenet of microeconomic theory, the relation between competition and technical efficiency is less well understood. Neoclassical models of profit-maximization subsume static cost-minimizing behavior regardless of market competitiveness, but agency models of managerial behavior suggest possible scope for competition to influence cost-reducing effort choices. This paper explores the empirical effects of competition on technical efficiency in the context of electricity industry restructuring. Restructuring programs adopted by many U.S. states made utilities residual claimants to cost savings and increased their exposure to competitive markets. We estimate the impact of these changes on annual generating plant-level input demand for non-fuel operating expenses, the number of employees and fuel use. We find that municipally-owned plants, whose owners were for the most part unaffected by restructuring, experienced the smallest efficiency gains over the past decade. Investor-owned utility plants in states that restructured their wholesale electricity markets had the largest reductions in nonfuel operating expenses and employment, while investor-owned plants in nonrestructuring states fell between these extremes. The analysis also highlights the substantive importance of treating the simultaneity of input and output decisions, which we do through an instrumental variables approach.

Keywords: Efficiency, Production, Competition, Electricity restructuring, Electric Generation, Regulation

JEL Classification: L11, L43, L51, L94, D24

Suggested Citation

Markiewicz, Kira and Rose, Nancy L. and Wolfram, Catherine D., Does Competition Reduce Costs? Assessing the Impact of Regulatory Restructuring on U.S. Electric Generation Efficiency (November 2004). MIT Department of Economics Working Paper No. 04-37. Available at SSRN: https://ssrn.com/abstract=618281 or http://dx.doi.org/10.2139/ssrn.618281

Kira Markiewicz

affiliation not provided to SSRN

No Address Available

Nancy L. Rose (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-280B
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Catherine D. Wolfram

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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