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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. 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.
    2. Wayne Y. Lee & Anjan V. Thakor, 2004. "Regulatory Pricing and Capital Investment under Asymmetric Information about Cost," Finance 0411022, EconWPA.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. Donald Vitaliano & Gregory Stella, 2009. "A Frontier Approach to Testing the Averch-Johnson Hypothesis," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 16(3), pages 347-363.
    12. Paroma Sanyal, 2005. "Powering a Green Progress: The Effect of Electricity Deregulation on Environmental Research," Industrial Organization 0504015, EconWPA.
    13. Lynk, E. L., 1995. "Testing efficiency in intermediate regulated industries," Economics Letters, Elsevier, vol. 49(3), pages 323-328, September.

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