University of California Energy Institute

This paper is an empirical assessment of the comparative efficiency of governance structures in an environment marked by high uncertainty. We analyze the short-term impact of retail deregulation on the productive efficiency of electric utilities in the United States. We argue that there are transitory costs linked to the process of deregulation. The business strategy literature suggests different governance structures to cope with uncertainty linked to changing regulatory environments. Transaction cost economics suggests that firms may reduce their exposure to the uncertainty created by the process of deregulation by adopting vertical integration strategies. Organizational scholars on the contrary argue that firms vertically disintegrate and adopt flexible governance structures to increase their adaptability to the new conditions. Our empirical analysis is based on 177 investor-owned electric utilities representing 83% of the total U.S. electricity production by utilities from 1998-2001. Our results show that the process of deregulation has a negative impact on firms’ productive efficiency measured using Data Envelopment Analysis. However, firms that are vertically integrated into electricity generation or that rely on the market for the supply of their electricity are more efficient than firms that adopt hybrid structures combining vertical integration and contracting.