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The Effect of Wholesale Market Deregulation on Shareholder Wealth in the Electric Power Industry

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  • Besanko, David
  • D'Souza, Julia
  • Thiagarajan, S Ramu

Abstract

This paper analyzes electric utility stock price reactions to events preceding the passage of the Energy Policy Act of 1992, a development that precipitated the onset of competition in the wholesale sector of the electric utility industry and accelerated the pace toward state-level deregulation of the retail sector. For the industry as a whole, we find that, at worst, investors had neutral reactions to events preceding wholesale deregulation. However, stock price reactions vary systematically with differences in incumbent utilities' marginal costs, though not with differences in fixed costs or purchased power costs. These results are consistent with the notion that new technologies have substantially reduced barriers to entry into the electric power generation industry, rendering capital cost advantages of incumbent utilities vulnerable to being neutralized by new entrants. However, marginal cost advantages are more likely to be sustainable because they are likely to be driven by inimitable locational advantages. Copyright 2001 by the University of Chicago.

Suggested Citation

  • Besanko, David & D'Souza, Julia & Thiagarajan, S Ramu, 2001. "The Effect of Wholesale Market Deregulation on Shareholder Wealth in the Electric Power Industry," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 65-88, April.
  • Handle: RePEc:ucp:jlawec:v:44:y:2001:i:1:p:65-88
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    File URL: http://dx.doi.org/10.1086/320268
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    References listed on IDEAS

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    1. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    2. Dnes, Antony W. & Kodwani, Devendra G. & Seaton, Jonathan S. & Wood, Douglas, 1998. "The Regulation of the United Kingdom Electricity Industry: An Event Study of Price-Capping Measures," Journal of Regulatory Economics, Springer, vol. 13(3), pages 207-225, May.
    3. J. Gregory Sidak & William Baumol, 1995. "Transmission Pricing and Stranded Costs in the Electric Power Industry," Books, American Enterprise Institute, number 52281.
    4. repec:bla:joares:v:24:y:1986:i:2:p:316-334 is not listed on IDEAS
    5. repec:bla:joares:v:21:y:1983:i:1:p:184-221 is not listed on IDEAS
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    Cited by:

    1. Bel, Germà & Trillas, Francesc, 2005. "Privatization, corporate control and regulatory reform: the case of Telefonica," Telecommunications Policy, Elsevier, vol. 29(1), pages 25-51, February.
    2. Steven Davis & Cheryl Grim & John Haltiwanger & Mary Streitwieser, 2007. "Electricity Pricing to U.S. Manufacturing Plants, 1963-2000," Working Papers 07-28, Center for Economic Studies, U.S. Census Bureau.

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