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A Look Upstream: Electricity Market Restructuring, Risk, Procurement Contracts and Efficiency

Author

Listed:
  • Corrado Di Maria
  • Ian A. Lange
  • Emiliya Lazarova

Abstract

This paper analyzes theoretically and empirically how upstream markets are affected by deregulation downstream. Deregulation tends to increase the level of uncertainty in the upstream market. Our theoretical analysis predicts that deregulated firms respond to this increase in uncertainty by writing more rigid contracts with their suppliers. Using the restructuring of the electricity market in the U.S. as our case study, we find support for our theoretical predictions. Furthermore, we investigate the impact this change in procurement contracts has on efficiency. Focusing on coal mines, we find that those selling coal to plants in restructured markets are significantly more productive than their counterparts working with regulated plants. On the other hand, we also find that transaction costs may have increased as a consequence of deregulation.

Suggested Citation

  • Corrado Di Maria & Ian A. Lange & Emiliya Lazarova, 2014. "A Look Upstream: Electricity Market Restructuring, Risk, Procurement Contracts and Efficiency," CESifo Working Paper Series 5124, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5124
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    References listed on IDEAS

    as
    1. Steve Cicala, 2015. "When Does Regulation Distort Costs? Lessons from Fuel Procurement in US Electricity Generation," American Economic Review, American Economic Association, vol. 105(1), pages 411-444, January.
    2. Chan, H. Ron & Fell, Harrison & Lange, Ian & Li, Shanjun, 2017. "Efficiency and environmental impacts of electricity restructuring on coal-fired power plants," Journal of Environmental Economics and Management, Elsevier, vol. 81(C), pages 1-18.
    3. Maria Kozhevnikova & Ian Lange, 2009. "Determinants of Contract Duration: Further Evidence from Coal-Fired Power Plants," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(3), pages 217-229, May.
    4. Ng, Charles K & Seabright, Paul, 2001. "Competition, Privatisation and Productive Efficiency: Evidence from the Airline Industry," Economic Journal, Royal Economic Society, vol. 111(473), pages 591-619, July.
    5. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
    6. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, January.
    7. Newbery, David M & Pollitt, Michael G, 1997. "The Restructuring and Privatization of Britain's CEGB--Was It Worth It?," Journal of Industrial Economics, Wiley Blackwell, vol. 45(3), pages 269-303, September.
    8. Kabir Malik & Maureen Cropper & Alexander Limonov & Anoop Singh, 2011. "Estimating the Impact of Restructuring on Electricity Generation Efficiency: The Case of the Indian Thermal Power Sector," NBER Working Papers 17383, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    energy policy; electricity market restructuring; deregulation; procurement contracts; risk; efficiency;

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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