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A Frontier Approach to Testing the Averch-Johnson Hypothesis

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  • Donald F. Vitaliano

    ()
    (Department of Economics, Rensselaer Polytechnic Institute, Troy NY 12180-3590, USA)

  • Gregory Stella

    (New York State Public Service Commission)

Abstract

The mathematical programming technique Data Envelopment Analysis is used to test the hypothesis of Averch and Johnson that utility regulation leads to overuse of capital. The regulated firm earns a return s greater than its cost of capital r, an implicit capital subsidy resulting in allocative inefficiency. Technical and Allocative inefficiency are based on Cost and Production Frontiers from 337 electric generating plants, and r is based on the Capital Asset Pricing Model. Capital is overused relative to fuel, but not labor. But regression analysis fails to find a significant relationship between the overuse of capital and the subsidy s-r.

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Paper provided by Rensselaer Polytechnic Institute, Department of Economics in its series Rensselaer Working Papers in Economics with number 0613.

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Date of creation: Jun 2006
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Handle: RePEc:rpi:rpiwpe:0613

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  1. Thomas G. Cowing & V. Kerry Smith, 1978. "The Estimation of a Production Technology: A Survey of Econometric Analyses of Steam-Electric Generation," Land Economics, University of Wisconsin Press, vol. 54(2), pages 156-186.
  2. 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.
  3. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
  4. R. D. Banker & A. Charnes & W. W. Cooper, 1984. "Some Models for Estimating Technical and Scale Inefficiencies in Data Envelopment Analysis," Management Science, INFORMS, vol. 30(9), pages 1078-1092, September.
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