Does competition reduce costs? : assessing the impact of regulatory restructuring on U.S. electric generation efficiency

2004·1.7 MB·English

by  Markiewicz, Kira

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Massachusetts Institute ot Technology
Department of Economics
Working Paper Series
DOES COMPETITION REDUCE COSTS?
ASSESSING THE IMPACT OF REGULATORY
RESTRUCTURING ON
ELECTRIC GENERATION EFFICIENCY
U.S.
Kira Markiewicz
Nancy Rose
Catherine Wolfram
Working Paper 04-37
November 2004
RoomE52-251
50 Memorial Drive
MA
Cambridge, 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://ssrn.com/abstract=6 828
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MASSACHUSETTS INSTITUTE
OFTECHNOLOGY
DEC 7 200^
LIBRARIES
Does Competition Reduce Costs?
Assessing the Impact ofRegulatory Restructuring
on U.S. Electric Generation Efficiency
Kira Markiewicz
UC Berkeley, Haas School ofBusiness
Nancy L. Rose
MIT and NBER
Catherine Wolfram
UC Berkeley and NBER*
November 2004
* markiewi(a),haas.berkeley.edu nrosefajmit.edu [email protected] Roseacknowledges support
. , .
fromtheMITCenterfor Energy and Environmental Policy ResearchandtheHooverInstitution. Wethank
participants attheNBER Productivity Program Meeting,theNBER10 SummerInstituteMeeting, the
University ofCaliforniaEnergy InstitutePOWERconference, andthe MITCenter forEnergy and
Environmental Policy Researchconference,aswell as seminarparticipants atHarvard, MIT, UC Berkeley,
UCDavis and Yale fortheirsuggestions. We areparticularly grateful forthedetailed commentson earlier
draftsprovidedby Al Klevorick, MarkRoberts, Charles Rossman and Johannes Van Biesebroeck. We
alsothankTom Wilkeningforassistance incoding restructuringpolicy characteristics across states.

Does Competition Reduce Costs?
Assessing the Impact ofRegulatory Restructuring
on U.S. Electric Generation Efficiency
Kira Markiewicz
Nancy L. Rose
Catherine Wolfram
Abstract
Althoughthe allocative efficiency benefits ofcompetition are atenetofmicroeconomictheory, the
relation between competition andtechnical efficiency is less well understood. Neoclassical
models ofprofit-maximization subsume static cost-minimizing behaviorregardless ofmarket
competitiveness, but agency models ofmanagerial behaviorsuggest possible scope for
competitionto influence cost-reducing effortchoices. This paperexplores the empirical effects of
competition on technical efficiency inthe contextofelectricity industry restructuring.
Restructuring programs adopted by many U.S. states made utilities residual claimantsto cost
We
savings and increasedtheirexposure to competitive markets. estimatethe impact ofthese
changes on annual generating plant-level inputdemand fornon-fuel operating expenses, the
number ofemployees and fuel use. We findthatmunicipally-ownedplants, whose owners were
forthe mostpart unaffected by restructuring, experiencedthe smallest efficiency gains overthe
pastdecade. Investor-owned utility plants in states thatrestructuredtheirwholesale electricity
markets hadthe largest reductions innonfuel operating expenses and employment, while investor-
ownedplants in nonrestructuring states fell betweentheseextremes. The analysis also highlights
the substantive importance oftreatingthe simultaneity ofinput and outputdecisions, which we do
through an instrumental variables approach.
JEL Codes: L L43, L5 L94, D24
1 1, 1,
Keywords: Efficiency, Production, Competition, Electricity restructuring, Electric
Generation, Regulation