Has Restructuring Improved Operating Efficiency at US Electricity Generating Plants?

This paper assesses whether impending electricity industry restructuring in an investor-owned utility’s home state encourages the utility to improve efficiency at its generating plants. Under costplus regulation, utilities have little incentive to reduce operating costs since they can pass them directly to ratepayers. Restructuring programs increase utilities’ exposure to competitive markets for wholesale electricity and ultimately, to competition for their retail customers. Many restructuring programs have been preceded or accompanied by transitional rate freezes, essentially placing the utility under price cap regulation. We test the impact of these changes on the operating efficiency of electric generating plants. Using annual plant-level data, we compare changes in nonfuel operating expenses and the number of employees in states that moved quickly to deregulate wholesale markets to those in states that have not pursued restructuring. Our results suggest that utilities in states enacting restructuring may have reduced nonfuel operating expenses; evidence on employment is mixed. Production function estimates suggest no significant changes in fuel efficiency, and provide mixed evidence of changes in the efficiency of labor and maintenance activity.