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Regulatory Opportunism and Investment Behavior: Evidence from the U.S. Electric Utility Industry

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Author Info

  • Thomas P. Lyon

    ()
    (University of Michigan)

  • John W. Mayo

    ()
    (Georgetown University)

Abstract

Large sunk costs and incomplete regulatory contracts in public utilities create the possibility of opportunistic behavior by either regulators or regulated firms. We present an empirical methodology for identifying opportunism within a regulated setting, and apply it to the large-scale cost disallowances levied by state regulators on electric utilities during the 1980s. Examining the investment propensity of all firms---both those that faced cost disallowances and those that did not---within particular regulatory jurisdictions, we find little evidence that cost disallowances were opportunistic. Instead, regulators appear to have been largely driven by the desire to punish specific poorly managed utilities.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 3 (Autumn)
Pages: 628-644

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Handle: RePEc:rje:randje:v:36:y:2005:3:p:628-644

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Cited by:
  1. Carlos Pérez Montes, 2011. "Optimal capital structure and Regulatory Control," Banco de Espa�a Working Papers 1128, Banco de Espa�a.
  2. Jacques Pelkmans & Lionel Kapff, 2010. "Interconnector Investment for a Well-functioning Internal Market. What EU regime of regulatory incentives?," Bruges European Economic Research Papers 18, European Economic Studies Department, College of Europe.
  3. Roland Strausz, 2009. "Regulatory Risk under Optimal Incentive Regulation," SFB 649 Discussion Papers SFB649DP2009-006, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Thomas Lyon & Nathan Wilson, 2012. "Capture or contract? The early years of electric utility regulation," Journal of Regulatory Economics, Springer, vol. 42(3), pages 225-241, December.
  5. Graeme Guthrie, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Journal of Economic Literature, American Economic Association, vol. 44(4), pages 925-972, December.
  6. Gugler, Klaus & Rammerstorfer, Margarethe & Schmitt, Stephan, 2013. "Ownership unbundling and investment in electricity markets — A cross country study," Energy Economics, Elsevier, vol. 40(C), pages 702-713.

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