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Cost savings and deregulation: an analysis of fuel cost savings in deregulated electricity markets

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  • Qingxin He
  • Jonathan M. Lee
  • Zagros Madjd-Sadjadi

Abstract

Unregulated utilities face competitive pressures that lead to cost-minimizing activities, but regulated monopolies in the US electricity generation sector face pressures only from regulators who must balance a desire for lower prices against the need for the utility to generate a sufficient return to encourage investment. This paper analyses the cost-minimizing behaviours of regulated utilities by comparing their average input coal costs with those of deregulated utilities purchasing coal from the same mine during the same month of the same year. Results indicate that coal-fired electric plants operating in deregulated electricity markets negotiate prices that are 6.1 ¢/MMBtu (3.5%) less than their regulated counterparts. In percentage terms, this is a fairly small discount for deregulated plants, but it happens to be on par with the restructuring gains that others have estimated for labour and nonfuel costs.

Suggested Citation

  • Qingxin He & Jonathan M. Lee & Zagros Madjd-Sadjadi, 2016. "Cost savings and deregulation: an analysis of fuel cost savings in deregulated electricity markets," Applied Economics Letters, Taylor & Francis Journals, vol. 23(16), pages 1173-1176, November.
    • Handle: RePEc:taf:apeclt:v:23:y:2016:i:16:p:1173-1176
    DOI: 10.1080/13504851.2016.1142646
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    References listed on IDEAS

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    1. Joskow Paul L., 2008. "Incentive Regulation and Its Application to Electricity Networks," Review of Network Economics, De Gruyter, vol. 7(4), pages 1-14, December.
    2. Richard Schmalensee & Robert N. Stavins, 2013. "The SO 2 Allowance Trading System: The Ironic History of a Grand Policy Experiment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 103-122, Winter.
    3. Kira R. Fabrizio & Nancy L. Rose & Catherine D. Wolfram, 2007. "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency," American Economic Review, American Economic Association, vol. 97(4), pages 1250-1277, September.
    4. He, Qingxin & Lee, Jonathan M., 2016. "The effect of coal combustion byproducts on price discrimination by upstream industries," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 11-24.
    5. Meghan R. Busse & Nathaniel O. Keohane, 2007. "Market effects of environmental regulation: coal, railroads, and the 1990 Clean Air Act," RAND Journal of Economics, RAND Corporation, vol. 38(4), pages 1159-1179, December.
    6. Adam R. Fremeth & Guy L. F. Holburn, 2012. "Information Asymmetries and Regulatory Decision Costs: An Analysis of U.S. Electric Utility Rate Changes 1980--2000," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(1), pages 127-162.
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    Cited by:

    1. Knittel, Christopher R. & Metaxoglou, Konstantinos & Trindade, André, 2019. "Environmental implications of market structure: Shale gas and electricity markets," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 511-550.

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