*Names in bold indicate Presenter
A detailed (although dated) literature has addressed the use of fossil fuel in electric utilities. Early work in this area aggregated fuels as a single input (Nordin (1947); Lomax (1952); Iulo (1961); Komiya (1962); Nerlove (1963); Barzel (1963) (1964); Dhrymes and Kurz (1964); Ling (1964); McFadden (1964); Belinfante (1969); Cowing (1970); Fuss (1970), (1971); Lawrence (1972); Greene (1974); Joskow and Mishkin (1974)) (see Atkinson et al. (1976) for discussions of the limitations on early research in this area). Galatin (1968) summarized much of the early literature. Beginning in the 1970s, researchers built in assumptions to allow cross-price elasticities of fuel demand and fuel substitution over the short run, via fuel switching (Atkinson and Halvorsen, 1976 ) or the long run, through investment in new boiler technology (Joskow and Mishkin, 1977; Seifi and McDonald, 1986). And Mountain (1982) and Uri (1977) have conducted studies at the regional level which combines short-run and long-run effects showing substantial fuel substitution effects.
We employ a 2-stage least squares model that explains changes in fuel use as a function of coal and gas fuel prices, coal and gas price volatility, coal and gas futures prices, coal and gas futures volatility, and six coded state utility regulatory characteristics, including breadth of fixed cost recovery, breadth of variable cost recovery, market distortion characteristics, market oversight characteristics, and the investment climate provided by state regulators. We repeat this model across sub-samples of data aggregated at the plant level and holding company level. Preliminary results have demonstrated several fuel substitution behaviors within and across plants and by holding companies, as well as several frictions that suggest a variety of market and regulatory barriers to fuel substitution.
In addition to improving estimates related to the short-term substitution across fuels, we hope to test the impact of fuel market and regulatory characteristics on plant level fuel use. In particular, we seek to understand how rules and decision-making by state public service commissions impacts firm and plant-level fuel use decisions, resulting in different environmental impacts from energy production. We test the role of fuel price volatility (as measured through an annual metric of the spot market variance), the role of futures prices, and regulatory uncertainty related to the treatment of capital investments, as measured by a third party metric of investment permissiveness of state public service commissions. Finally, we expect that interactions between state regulatory characteristics and fuel prices to produce a unique understanding of the intersection between markets and regulation.