Center for the Study of Energy Markets

This paper assesses the impact of electricity industry restructuring on generating plant operating efficiency. Cost-plus regulation flows costs through to ratepayers, providing utilities with few incentives to reduce operating costs. Restructuring programs increase utilities’ exposure to competitive markets, altering these incentives. We test the impact of these changes by estimating input demand equations using annual generating plant-level data. We compare changes in non-fuel operating expenses, the number of employees and fuel use across three groups of plants: municipally owned plants, whose owners were for the most part unaffected by restructuring, investor-owned utility plants in states that have not pursued restructuring, and investor-owned utility plants in states that had restructured their wholesale electricity markets prior to the California electricity crisis of 2000-2001. Our results suggest that municipally-owned plants experienced the smallest efficiency gains while investor-owned utility plants in restructured environments had the largest reductions in nonfuel operating expenses and employment. The analysis also highlights the importance of treating the simultaneity of input and output decisions, which we do through an instrumental variables approach.