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Regulatory Reform and Economic Performance in US Electricity Generation

In this paper we investigate the effect of the introduction of incentive regulation upon the total factor productivity (TFP) growth of electricity generation companies in the United States, using sample data on 61 firms observed over a 13-year period from 1986 to 1998. Empirical estimates of TFP growth are obtained using three techniques: Tornqvist index numbers, a stochastic cost frontier and a stochastic input distance function. The results obtained using the stochastic cost frontier are discarded because they are found to differ from those obtained using the other techniques, apparently as a consequence of violations of the required cost minimizing behavioral assumptions, which are not uncommon in regulated industries. Tests of hypotheses regarding the effect of regulatory reform upon TFP (using the distance function results) indicate that the introduction of incentive regulation has not had the desired positive effect upon the economic performance of the firms involved. In fact, in the case of these data, we find that performance is negatively related with the introduction of the new regulatory regimes, a result that is the opposite of the theoretical predictions.

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File URL: http://www.uq.edu.au/economics/cepa/docs/WP/WP062004.pdf
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Paper provided by School of Economics, University of Queensland, Australia in its series CEPA Working Papers Series with number WP062004.

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Date of creation: Sep 2004
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Handle: RePEc:qld:uqcepa:11
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  1. Atkinson, Scott E. & Primont, Daniel, 2002. "Stochastic estimation of firm technology, inefficiency, and productivity growth using shadow cost and distance functions," Journal of Econometrics, Elsevier, vol. 108(2), pages 203-225, June.
  2. Jamasb, T. & Pollitt, M., 2001. "Benchmarking and Regulation of Electricity Transmission and Distribution Utilities: Lessons from International Experience," Cambridge Working Papers in Economics 0101, Faculty of Economics, University of Cambridge.
  3. Paul W. Bauer, 1988. "Decomposing TFP growth in the presence of cost inefficiency, nonconstant returns to scale, and technological progress," Working Paper 8813, Federal Reserve Bank of Cleveland.
  4. George E. Battese & Greg S. Corra, 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 21(3), pages 169-179, December.
  5. Timothy J. Considine, 2000. "Cost Structures for Fossil Fuel-Fired Electric Power Generation," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 83-104.
  6. Coelli, Tim & Perelman, Sergio, 1999. "A comparison of parametric and non-parametric distance functions: With application to European railways," European Journal of Operational Research, Elsevier, vol. 117(2), pages 326-339, September.
  7. Greene, William H., 1980. "On the estimation of a flexible frontier production model," Journal of Econometrics, Elsevier, vol. 13(1), pages 101-115, May.
  8. Atkinson, Scott E & Cornwell, Christopher & Honerkamp, Olaf, 2003. "Measuring and Decomposing Productivity Change: Stochastic Distance Function Estimation versus Data Envelopment Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(2), pages 284-94, April.
  9. Atkinson, Scott E & Halvorsen, Robert, 1980. "A Test of Relative and Absolute Price Efficiency in Regulated Utilities," The Review of Economics and Statistics, MIT Press, vol. 62(1), pages 81-88, February.
  10. Burns, Philip & Weyman-Jones, Thomas G, 1996. "Cost Functions and Cost Efficiency in Electricity Distribution: A Stochastic Frontier Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 48(1), pages 41-64, January.
  11. Luis Orea, 2002. "Parametric Decomposition of a Generalized Malmquist Productivity Index," Journal of Productivity Analysis, Springer, vol. 18(1), pages 5-22, July.
  12. Battese, George E. & Corra, Greg S., 1977. "Estimation Of A Production Frontier Model: With Application To The Pastoral Zone Of Eastern Australia," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 21(03), December.
  13. Caves, Douglas W & Christensen, Laurits R & Diewert, W Erwin, 1982. "The Economic Theory of Index Numbers and the Measurement of Input, Output, and Productivity," Econometrica, Econometric Society, vol. 50(6), pages 1393-1414, November.
  14. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  15. Rungsuriyawiboon, Supawat & Stefanou, Spiro E., 2007. "Dynamic Efficiency Estimation: An Application to U.S. Electric Utilities," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 226-238, April.
  16. David M. Newbery, 2002. "Privatization, Restructuring, and Regulation of Network Utilities," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640481, June.
  17. Carrington, Roger & Coelli, Tim & Groom, Eric, 2002. "International Benchmarking for Monopoly Price Regulation: The Case of Australian Gas Distribution," Journal of Regulatory Economics, Springer, vol. 21(2), pages 191-216, March.
  18. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July.
  19. Christensen, Laurits R & Greene, William H, 1976. "Economies of Scale in U.S. Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 655-76, August.
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