UC Berkeley

In this thesis, I investigate economic inefficiencies related to the regulation of energy and environmental markets. Two papers focus on how regulation affects vertical contracting, either in the upstream market for natural gas pipeline capacity or hazardous waste disposal. The third chapter focuses on how differences in regulation across neighboring electricity markets can create inefficiency in interregional trade.

In the first chapter, I study how rate-of-return pricing regulation enables firms to transfer profits between regulated and unregulated affiliates. Pricing regulation in the United States commonly allows firms in regulated markets to pass on increases in input costs onto captive consumers. However, when regulated firms are vertically integrated with input suppliers, this form of regulation creates incentives for firms to extract profits by overpaying their affiliated supplier and then recovering costs from consumers, a phenomenon known as ``regulatory evasion". I test for evidence of evasion by studying input procurement decisions of firms in a major price-regulated market in the US, specifically electric and natural gas utilities deciding to procure natural gas pipeline capacity. Using a hand-built dataset on bilateral contracts of pipeline companies, I apply a triple-differences approach to test whether utilities procure more capacity at higher prices when contracting with an affiliated pipeline company, relative to other buyers who do not face pricing regulation. Results show that evasion by utilities is significant: utilities procure too much capacity from affiliates causing pipeline companies to overbuild new capacity by 28-33 percentage points on average. In contrast, I do not find that utilities pay differentially higher markups to affiliated pipeline companies relative to non-regulated buyers. I develop a model of regulatory oversight that shows how asymmetric information can rationalize the limited impact of evasion incentives on prices. Extrapolating estimates of overbuilding to all interstate natural gas pipeline projects built between 2010 and 2021, my estimates suggest that regulatory evasion by utilities has shifted $2.4 billion in excessive input costs onto consumers.

In the second chapter, I study whether firms factor in expected liability costs from regulation when entering contracts. In particularly, I evaluate how joint liability laws influence vertical supply chains by influencing who firms choose to contract with. Using data on contracts from 2001-2017 between hazardous waste generators and disposal firms, I investigate whether weak joint liability rules increase the market share of disposal firms with higher rates of spills and accidents. First, I measure generator's beliefs over the probability that disposal firms have a spill using a Bayesian learning process. Next, I leverage a natural experiment created by the resolution of circuit split on the extent of joint liability prescribed by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and compare market shares for spill prone disposal firms in circuits where joint liability was weakened to those in circuits where expected liability costs of contracting were not affected.

I find that the difference in market share between dirty and clean disposal firms grew 28.7% on average in treated markets after the resolution of the circuit split with the greatest gains going to the dirtiest firms. Event study results suggest that generators do not immediately respond to the removal of the joint liability regime until after their long-term contracts have ended. These results suggest that firms actively make contracting decisions based on expected future liability costs and that removing joint liability rules may have significant effects on the likelihood of environmental damages.

The final chapter summarizes joint work with Julie Mulvaney-Kemp and Dev Millstein on inefficiencies in interregional transmission usage in the United States. Market integration between regions can increase allocative efficiency when independent system operators are able to import electricity that is cheaper the what it costs to generate power locally. However, differences in system operating rules and procedures may undercut efficiency benefits from interregional transmission if they mis-coordinate when energy should be transferred. The study examines electricity flows across all major regional authorities in the United States between 2014 to 2023 to measure inefficiency induced by market seams issues. We develop a metric of inefficiency referred to as ``uneconomic flow" which tests whether the direction of energy flows in accordance with price differences between across regions and document the share of flow on a seem that is uneconomic under a variety of pricing conditions.

The findings reveal that approximately 24% of all net flow on the interfaces studied displaces relatively cheaper within-region generation, indicating substantial inefficiencies in transmission usage. Moreover, the analysis highlights significant heterogeneity in the level of inefficiency across interfaces, with uneconomic flow persisting even during high-value hours when price differences between regions are large. We discuss various factors that may contribute to inefficiencies, including the physical characteristics of transmission lines, market design, and regional differences. The paper concludes by emphasizing the importance of addressing these inefficiencies to facilitate the transition to a low-carbon electricity system and suggests that transmission capacity models should account for the possibility of uneconomic flow when valuing benefits from capacity expansion.