Panel Paper: Electricity Regulation and Utility Investment and Fuel Choice

Saturday, November 10, 2012 : 2:05 PM
Hanover A (Radisson Plaza Lord Baltimore Hotel)

*Names in bold indicate Presenter

Daniel Matisoff, Fanny Guezennec, Emilson Silva and Douglas Noonan, Georgia Institute of Technology

This paper seeks to understand how fuel cost and fixed cost recovery regulation influences public utilities investment and generation behavior in the US. Building on the seminal work of Stigler and Friedland (1962), the existing literature has primarily developed in two directions. A first field of study investigates the indirect impact of the regulatory structure of the PSC (type of appointment, resources, and professionalism of the commission) on the performance of the industry (Berry, 1979; Besley & Coate, 2003; Fremeth & Holburn, 2012; Gormley, 1983; Sautter & Twaite, 2009). A second branch of literature has focused on the direct impact of specific rules or policies, such as automatic adjustment clause, renewable portfolio standards, information disclosure rules, etc. (Carley, 2009; Isaac, 1982; Kaserman & Tepel, 1982; Kneifel, 2008; Menz & Vachon, 2006; Morgan, 1993; Yin & Powers, 2010). This study follows a different approach and investigates the cumulative impact of a larger set of rules, based on their institutional characteristics.

The regulatory structure faced by utilities is a complex system, consisting of an aggregation of rules resulting from numerous policies enacted over a long period of time. We have categorized the structure of the regulatory system based on 5 important institutional characteristics: the breadth of cost recovery allowed by the PSC, the oversight of the PSC over the decisions of utilities, the market correction/distortion power of the PSC, the ability of the PSC and the discretionary power of the PSC.

To perform our empirical analysis, we coded 50 rules used by PSCs to regulate electric utilities for all 50 states. This coding serves as a basis to construct aggregated indicators that reflect the main characteristics of the regulatory structure. We develop formal models of the decision making process of utilities under certain rule arrangements. Using these formal models, we derive and test hypotheses that explore the relationship between rule structure and the price of electricity, the fuel and technology choice in investment decisions for new electric generation capacity, and decisions related to fuel use and fuel switching. We test these models through state-level econometric models. Preliminary findings suggest that the price of electricity is positively correlated with the level of market distortion power of the PSC, positively correlated with the level of oversight of the PSC, and negatively correlated with the breadth of variable cost recovery rules. This study will also measure the impact of these PSC characteristics on future generation investment decisions (level and type), fuel type consumption.