In this paper, we examine the issue of why some parent companies of U.S. electric utilities have expanded into domestic independent power production (IPP) but not others. We evaluate the conjecture that the parent companies who have chosen to participate in recently restructured U.S. wholesale electricity markets are those with the most generation cost advantages. Specifically, we empirically investigate the link between apparent advantages in two types of generation costs, operation & maintenance (O&M) and capital, and the IPP participation decision. We use electric utility data from FERC Form 1 and combine it with IPP data collected from various industry sources. The data is analyzed using both a descriptive approach and the estimation of a simple competitive entry model. The results indicate that utility parent companies that expand into domestic IPP do tend to have much lower reported utility generation O&M costs. Moreover, they also tend to have divested some of their own utility power plants. The former provides some hope that restructuring is having the desired entry/exit effect while the latter raises some concerns about power plant "swapping" among utilities. Other measures capturing the financial health of the utility parent company seem to have little explanatory power, after controlling for other benefits stemming from utility scale of operation.

We examine the adoption of gas turbine electricity generators by electric utilities and independent power producers from 1980 to 2001 in search of evidence of economic regulation inducing particular type of technology adoption and development. We focus on three major attributes of gas turbines - capacity, heat rate, and age - and two major economic regulatory regimes - vertically integrated utilities operating price-regulated monopoly franchises and independent power producers competing in restructured, wholesale electricity markets. We argue and demonstrate using sales data that the decade long move toward greater “deregulation” of the electricity industry in the U.S. has led to a stronger incentive for firms to adopt large capacity, heavy frame turbines well suited for combined cycle, baseload applications. This suggests that recent and current developments of “CCGT” technology are examples of economic regulation-induced innovation.

The paper presents an empirical model of the "make or buy" decision faced by independent power producers (IPP) in restructured U.S. wholesale electricity markets. The model is applied to plant-level data that track the investment decisions of major IPPs from 1996 to 2000, yielding estimates of each firm's investment cost and expected profit functions. The estimates are used to evaluate the effectiveness of divestiture programs (which sold utility power plants to IPPs) in encouraging greater IPP participation. The estimates and counterfactual simulations indicate that a minimal amount of new power plant investments were "crowded out" by divestiture and that divestiture encouraged greater (short-run) entry, especially among utility-affiliated IPPs.

We investigate how uncertainty surrounding possible comprehensive regulatory restructuring affect the investment behavior of firms operating in the industry. We argue that such regulatory uncertainty can create a substantial option value that leads to firms delaying their investment decision in order to gather more information and assurances regarding future regulatory changes. We empirically examine this claim using data on U.S. electricity generation investment from 1996 to 2000. Using state-level, aggregate investment data, we find evidence that is consistent with the presence of substantial option value: a strong link between lesser aggregate generation investment and greater restructuring enactment uncertainty. Using data on firm-level generation investment decisions for a sample of major U.S. independent power producers (IPPs) from 1996 to 2000, we estimate a more structural model of generation investment that incorporates the option value effect. Comparing estimates from this “real options” based model with the corresponding estimates from two alternative models, expected Net Present Value (NPV) and Forward-Looking (FWL), we show that accounting for the option value can lead to different inferences regarding the impact of regulatory restructuring on IPP generation investment.

In this paper, we describe a framework modeling for investment in restructured electricity markets. This framework is extremely flexible, and is designed to be able to capture many of the key considerations that distinguish investment in deregulated electricity markets from both investment in regulated markets, and investment in competitive markets for other commodities. The model is composed of two distinct elements: a detailed model of short-run, or ‘spot market’ competition in electricity markets, and a dynamic long-run equilibrium model of investment decisions of firms. The investment choices by firms will be driven by the underlying profits implied by the short-term markets under different investment paths. Firms will choose the investment paths that lead them to more profitable states of short-term markets.

We implement the framework for a representative electricity market and several qualitative insights can be demonstrated. First, the incentives of individual firms to invest very much depends upon their position in the market. Second, the impact of market structure on investment incentives is also influenced by the firms’ contractual or retail obligations in the market. Just as long-term contracts or retail obligations change a firm’s incentives in the short-term markets, so do they influence investment decisions. Third, increased uncertainty – in our case in demand growth – can delay investment. This is a demonstration of the option value of waiting for further information before making an irreversible investment.

This paper empirically investigates the impact of airport and airline supply characteristics on the air travel choices of passengers departing from one of three San Francisco Bay area airports and arriving at one of four airports in greater Los Angeles. It does so by estimating a conditional logit model for the market of air travel between both metropolitan areas in 1995, and using the estimated model to simulate three counterfactual scenarios. First, reducing access times to San Francisco International airport by 10% for all travelers increases the market share of that airport by 4.5%-point. United Airlines benefits from the reduced access times, as its market share increases by 2.9%-point. Second, reducing average delays at San Francisco International airport by 10% has similar aggregate effects to the first scenario, but indicates that leisure travelers value access time reductions more than reduced delays. Third, entry of Southwest airlines in San Francisco International airport increases the market share of Southwest airlines by 5%-point to 15-%point, depending on assumptions concerning its continuation of services at Oakland International Airport, and assuming that rival carriers do not respond in terms of prices or service levels.