Concepedia

Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency

Kira R. Fabrizio, Nancy L. Rose, Catherine Wolfram

American Economic Review · 2007 · 408 citations · 40 references

TL;DR

Neoclassical models assume firms minimize costs, but agency models suggest they may not in less competitive or regulated settings. The study tests whether shifting from cost‑of‑service regulation to market‑oriented environments improves efficiency in US electric generating plants. The authors analyze the transition by examining input demand across many US electric generating plants during the regulatory restructuring. Publicly owned plants saw the smallest efficiency gains, while investor‑owned plants in restructured states improved the most, indicating modest medium‑term benefits from moving from regulated monopoly to market‑based structures. JEL codes: D24, L11, L51, L94, L98.

Abstract

While neoclassical models assume static cost-minimization by firms, agency models suggest that firms may not minimize costs in less-competitive or regulated environments. We test this using a transition from cost-of-service regulation to market-oriented environments for many US electric generating plants. Our estimates of input demand suggest that publicly owned plants, whose owners were largely insulated from these reforms, experienced the smallest efficiency gains, while investor-owned plants in states that restructured their wholesale electricity markets improved the most. The results suggest modest medium-term efficiency benefits from replacing regulated monopoly with a market-based industry structure. (JEL D24, L11, L51, L94, L98)