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

  • John Rust

    (University of Wisconsin)

  • Geoffrey Rothwell

    (Stanford University)

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.

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Paper provided by EconWPA in its series Industrial Organization with number 9508002.

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Length: 47 pages
Date of creation: 16 Aug 1995
Date of revision:
Handle: RePEc:wpa:wuwpio:9508002
Note: TeX file, Postscript version submitted, 47 pages
Contact details of provider: Web page: http://econwpa.repec.org

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  1. 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.
  2. 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.
  3. 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.
  4. P. L. Joskow & G. A. Rozanski, 1977. "The Effects of Learning by Doing on Nuclear Plant Operating Reliability," Working papers 209, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Dubin, Jeffrey A. & Rothwell, Geoffrey S., 1989. "Risk and reactor safety systems adoption," Journal of Econometrics, Elsevier, vol. 42(2), pages 201-218, October.
  6. 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 175-98, September.
  7. Geoffrey Rothwell & John Rust, 1995. "A Dynamic Programming Model of U.S. Nuclear Power Plant Operations," Microeconomics 9502001, EconWPA, revised 06 Feb 1995.
  8. Rothwell, Geoffrey, 1990. "Utilization and service : Decomposing nuclear reactor capacity factors," Resources and Energy, Elsevier, vol. 12(3), pages 215-229, September.
  9. Paul L. Joskow, 2006. "Incentive Regulation for Electricity Networks," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 4(2), pages 3-9, 07.
  10. Alfred E. Kahn, 1988. "The Economics of Regulation: Principles and Institutions," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262610523, June.
  11. Rothwell, Geoffrey, 1996. "Organizational Structure and Expected Output at Nuclear Power Plants," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 482-88, August.
  12. Sturm, Roland, 1995. "Why does nuclear power performance differ across Europe?," European Economic Review, Elsevier, vol. 39(6), pages 1197-1214, June.
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