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Deregulation, Restructuring and Changing R&D Paradigms in the US Electric Utility Industry

  • Paroma Sanyal

    (Brandeis University)

  • Linda R. Cohen

    (University of Califirnia, Irvine)

Registered author(s):

    This paper studies the impact of electricity deregulation and restructuring on research and development (R&D) expenditures of investor owned utilities. The differing pace of deregulation in the fifty states provides heterogeneity in institutional structure and competitive forces, and showcases the response of R&D funding to changing institutional environments. Based on a panel of all major investor-owned utilities from 1989-1997, this paper analyzes various political constraints, institutional change, and firm-specific financial and structural factors that have contributed to the decline of R&D expenditure in the U.S. electric utility industry. R&D is modeled as a two-stage process where firms first decide whether to invest in research depending on their critical mass and state characteristics, and then conditional on a positive decision, decide on the level of expenditure. A variation of the Heckman model is estimated in a panel data setting, allowing for separate effects of selection and intensity. The primary findings are: First, greater deregulation and competition has a positive effect on R&D whereas a higher probability of deregulation adversely affects research spending. The start date for retail competition and level and policies for stranded cost recovery do affect spending. Second, the response of R&D to financial and other firm attributes varies with the state of deregulation and provides insights into firm behavior in a regulated context. Third, the institutional and competitive factors interact in a way that suggest that full deregulation, coupled with effective retail competition may mitigate the problem of declining electricity R&D by the utilities.

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    File URL: http://econwpa.repec.org/eps/io/papers/0504/0504014.pdf
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    Paper provided by EconWPA in its series Industrial Organization with number 0504014.

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    Length: 35 pages
    Date of creation: 13 Apr 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpio:0504014
    Note: Type of Document - pdf; pages: 35
    Contact details of provider: Web page: http://econwpa.repec.org

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    1. Joskow, P.L., 1989. "Regulatory Failure, Regulatory Reform And Structural Change In The Electric Power Industry," Working papers 516, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Paul L. Joskow, 1997. "Restructuring, Competition and Regulatory Reform in the U.S. Electricity Sector," Journal of Economic Perspectives, American Economic Association, vol. 11(3), pages 119-138, Summer.
    3. Bushnell, James & Wolfram, Catherine, 2008. "Electricity Markets," Staff General Research Papers 31547, Iowa State University, Department of Economics.
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