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Optimal Response to Shift in Regulatory Regime: the Case of the U.S. Nuclear Power Industry

Author

Listed:
  • John Rust

    (University of Wisconsin)

  • Geoffrey Rothwell

    (Stanford University)

Abstract

This paper studies the impact of the March 1979 Three Mile Island (TMI) accident on the regulation of nuclear power plants (NPPs) and its consequences for the operating behavior and profitability of the U.S. nuclear power industry. We treat the TMI accident as a ``natural experiment'' that caused a sudden, unexpected, and permanent increase in the intensity of safety regulation by the U.S. Nuclear Regulatory Commission (NRC) and a shift toward increased disallowances of operating costs by state and local public utility commissions (PUCs). We analyze the nuclear power industry's reaction to this shift in regulatory regime using detailed monthly data on NPP operations collected by the NRC. We find that the industry has been very responsive to NRC regulation insofar as they impute a significantly higher cost to ``imprudent'' operation of a reactor in the post-TMI period than in the pre-TMI period. We find that while NPPs appear safer in the post-TMI period (in terms of having a lower rate of forced outages), they are also substantially less profitable: over 90\% of the expected discounted profits from continued operation of existing NPPs have been eliminated in the post-TMI period. Interestingly, we find that the hypothesis of expected discounted profit maximization provides a much better approximation to NPP operating behavior in the post-TMI period than in the pre-TMI period.

Suggested Citation

  • John Rust & Geoffrey Rothwell, 1995. "Optimal Response to Shift in Regulatory Regime: the Case of the U.S. Nuclear Power Industry," Industrial Organization 9508002, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpio:9508002
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    References listed on IDEAS

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    1. El-Gamal, Mahmoud A. & Grether, David M., 1995. "Are People Bayesian? Uncovering Behavioral Strategies," Working Papers 919, California Institute of Technology, Division of the Humanities and Social Sciences.
    2. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    3. Rothwell, Geoffrey, 1990. "Utilization and service : Decomposing nuclear reactor capacity factors," Resources and Energy, Elsevier, vol. 12(3), pages 215-229, September.
    4. Geoffrey Rothwell & John Rust, 1995. "A Dynamic Programming Model of U.S. Nuclear Power Plant Operations," Microeconomics 9502001, University Library of Munich, Germany, revised 06 Feb 1995.
    5. Joskow, Paul L & Rozanski, George A, 1979. "The Effects of Learning by Doing on Nuclear Plant Operating Reliability," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 161-168, May.
    6. Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(2), pages 3-9, 07.
    7. Dubin, Jeffrey A. & Rothwell, Geoffrey S., 1989. "Risk and reactor safety systems adoption," Journal of Econometrics, Elsevier, vol. 42(2), pages 201-218, October.
    8. David, Paul A. & Rothwell, Geoffrey S., 1996. "Measuring standardization: An application to the American and French nuclear power industries," European Journal of Political Economy, Elsevier, vol. 12(2), pages 291-308, September.
    9. Rothwell, Geoffrey, 1996. "Organizational Structure and Expected Output at Nuclear Power Plants," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 482-488, August.
    10. Sturm, Roland, 1995. "Why does nuclear power performance differ across Europe?," European Economic Review, Elsevier, vol. 39(6), pages 1197-1214, June.
    11. David, Paul A & Maude-Griffin, Roland & Rothwell, Geoffrey, 1996. "Learning by Accident? Reductions in the Risk of Unplanned Outages in U.S. Nuclear Power Plants after Three Mile Island," Journal of Risk and Uncertainty, Springer, vol. 13(2), pages 175-198, September.
    12. Alfred E. Kahn, 1988. "The Economics of Regulation: Principles and Institutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610523, January.
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    Citations

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    Cited by:

    1. Victor Aguirregabiria, 2006. "Another Look at the Identification of Dynamic Discrete Decision Processes: With an Application to Retirement Behavior," 2006 Meeting Papers 169, Society for Economic Dynamics.
    2. Aguirregabiria, Victor & Mira, Pedro, 2010. "Dynamic discrete choice structural models: A survey," Journal of Econometrics, Elsevier, vol. 156(1), pages 38-67, May.
    3. Lovering, Jessica R. & Yip, Arthur & Nordhaus, Ted, 2016. "Historical construction costs of global nuclear power reactors," Energy Policy, Elsevier, vol. 91(C), pages 371-382.
    4. Victor Aguirregabiria & Arvind Magesan, 2013. "Euler Equations for the Estimation of Dynamic Discrete Choice Structural Models," Working Papers tecipa-489, University of Toronto, Department of Economics.
    5. Victor Aguirregabiria, 2005. "Another Look at the Identification of Dynamic Discrete Decision Processes," Econometrics 0504006, University Library of Munich, Germany.
    6. Khaled Elsayed, 2006. "Reexamining the Expected Effect of Available Resources and Firm Size on Firm Environmental Orientation: An Empirical Study of UK Firms," Journal of Business Ethics, Springer, vol. 65(3), pages 297-308, May.
    7. repec:bla:reviec:v:25:y:2017:i:1:p:76-97 is not listed on IDEAS
    8. Aguirregabiria, Victor & Magesan, Arvind, 2013. "Euler Equations for the Estimation of Dynamic Discrete Choice Structural," MPRA Paper 46056, University Library of Munich, Germany.
    9. Wendy Chapple & Andrew Cooke & Vaughan Galt & David Paton, 2001. "The determinants of voluntary investment decisions," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 22(8), pages 453-463.

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    • L - Industrial Organization

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