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Regulation and Efficiency in the Electric Utility Industry

Author

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  • Leon Courville

Abstract

Rate-of-return regulation is a distinct feature of the public utility environment. More than ten years ago, it was argued that this form of regulation might induce utility companies to operate inefficiently. This, the "Averch-Johnson effect," in spite of being the subject of widespread discussion, has not been assessed through formal quantitative analysis. This paper attempts such an analysis and presents evidence on the existence of the "A-J effect" by investigating a cross section of electric power plants. The Averch-Johnson proposition is strongly confirmed. Estimates of the magnitude of the regulation-induced inefficiency are also provided.

Suggested Citation

  • Leon Courville, 1974. "Regulation and Efficiency in the Electric Utility Industry," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 53-74, Spring.
    • Handle: RePEc:rje:bellje:v:5:y:1974:i:spring:p:53-74
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    Cited by:

    1. Coggins, Jay S. & Swinton, John R., 1996. "The Price of Pollution: A Dual Approach to Valuing SO2Allowances," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 58-72, January.
    2. Matisoff, Daniel C. & Noonan, Douglas S. & Cui, Jinshu, 2014. "Electric utilities, fuel use, and responsiveness to fuel prices," Energy Economics, Elsevier, vol. 46(C), pages 445-452.
    3. Rod Tyers, 2015. "Service Oligopolies and Australia's Economy-Wide Performance," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 48(4), pages 333-356, December.
    4. Meredith Fowlie, 2010. "Emissions Trading, Electricity Restructuring, and Investment in Pollution Abatement," American Economic Review, American Economic Association, vol. 100(3), pages 837-869, June.
    5. Lam, Pun-Lee & Shiu, Alice, 2001. "A data envelopment analysis of the efficiency of China's thermal power generation," Utilities Policy, Elsevier, vol. 10(2), pages 75-83, June.
    6. John H. Crockett Jr., 1978. "Differential Pricing, Firm Capitalization, and the Regulatory Process in the Electric Power Industry," The American Economist, Sage Publications, vol. 22(1), pages 7-11, March.
    7. Chun Chun Ni, 2005. "Analysis of Applicable Liberalisation Models in China's Electric Power Market," Energy Working Papers 22008, East Asian Bureau of Economic Research.
    8. R. R. Officer, 1985. "Financial Targeting for Public Enterprise: The Criterion of a Rate of Return to Capital," Australian Journal of Management, Australian School of Business, vol. 10(2), pages 83-97, December.
    9. Fowlie, Meredith, 2005. "Emissions Trading, Electricity Industry Restructuring and Investment in Pollution Abatement," 2005 Annual meeting, July 24-27, Providence, RI 19265, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Lynk, E. L., 1995. "Testing efficiency in intermediate regulated industries," Economics Letters, Elsevier, vol. 49(3), pages 323-328, September.
    11. Shiyou Li & Emeka Nwaeze & Jennifer Yin, 2016. "Earnings management in the electric utility industry: profit incentives," Review of Quantitative Finance and Accounting, Springer, vol. 46(3), pages 633-660, April.
    12. Wayne Y. Lee & Anjan V. Thakor, 2004. "Regulatory Pricing and Capital Investment under Asymmetric Information about Cost," Finance 0411022, University Library of Munich, Germany.
    13. Gerald Granderson & C. A. Knox Lovell, 1998. "The Impact of Regulation on Input Substitution and Operating Cost," Southern Economic Journal, John Wiley & Sons, vol. 65(1), pages 83-97, July.
    14. Wayne Y. Lee & Anjan V. Thakor, 1982. "Optimal Regulatory Pricing Under Asymmetric Cost Information," Discussion Papers 580, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    15. Mirucki, Jean, 1980. "Vérification des conditions d'efficacité dans la production chez Bell Canada [Checking the conditions of efficient production in Bell Canada]," MPRA Paper 30147, University Library of Munich, Germany, revised Jun 1980.
    16. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters, in: Studies in Public Regulation, pages 1-78, National Bureau of Economic Research, Inc.
    17. Maria Brouwer, 2001. "Deregulation of Network Industries – Theory and Dutch Experience," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 3-27.
    18. Mirucki, Jean, 1980. "Comportement de l'entreprise réglementée: étude de l'hypothèse Averch-Johnson [Behavior of the Regulated Firm: A Study of the Averch-Johnson Hypothesis]," MPRA Paper 27669, University Library of Munich, Germany, revised 1982.
    19. Rode, David C. & Fischbeck, Paul S., 2019. "Regulated equity returns: A puzzle," Energy Policy, Elsevier, vol. 133(C).
    20. Grimley, Matthew & Chan, Gabriel, 2023. "“Cooperative is an oxymoron!”: A polycentric energy transition perspective on distributed energy deployment in the Upper Midwestern United States," Energy Policy, Elsevier, vol. 172(C).
    21. Paroma Sanyal, 2005. "Powering a Green Progress: The Effect of Electricity Deregulation on Environmental Research," Industrial Organization 0504015, University Library of Munich, Germany.

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