Essays on productivity and efficiency analysis in the U.S. electric utility industry
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In the past decade, as the environmental effects of emissions have become better understood, electric utility firms in the United States have faced increasing regulation. Meanwhile, with technology advances and increasing regional price disparity, a wave of deregulation policies have led to drastic structural changes in some states. Expanding on the previous literature, I conduct two empirical analyses of this industry. First, I estimate productivity and efficiency change and then I use these results to address questions in two subjects: the effect of environmental regulations and industry structural change. The first essay studies 78 major privately-owned electric utilities from 1988–2005, when government regulations reduced the allowable levels of pollutants, often dramatically. I estimate three models for the production of multiple inputs and multiple outputs with negative externalities: the traditional input distance function treating emissions as technology shifters, a quadratic output directional distance function with no emissions, and the directional distance function that credits firms for desirable goods and penalizes them for pollutants. I compare two approaches to the measurement of productivity growth and efficiency change: a Malmquist productivity index approach, based on ratios of the estimated distances, and a difference-in-log-distances approach. My results show higher productivity growth from the second approach. Additionally, I introduce a binary variable in the estimation of directional distances to distinguish firms that continuously generated steam electricity throughout my sample period from those that ceased production during this timeframe. My results show that firms that stopped their steam electricity generation were less efficient. Therefore, as environmental regulations reshaped this industry, more efficient and productive firms survived environmental regulatory changes and kept growing. The second essay is based on a panel data set of 377 fossil-fuel power plants from 1998–2005, when a substantial structural change occurred in response to deregulation policies. I estimate directional distance functions to model production, controlling for the effect of deregulation. I find that plants subject to deregulation tend to decrease their capital expenditure, labor and fuel consumption, but not necessarily lower emissions. Also I apply the Luenberger index approach to compute technical efficiency and productivity change and show that plants in deregulation states have slightly higher PC and EC.