Essays on the effect of regulatory restructuring in the electricity industry on independent power production

In the United States, electricity has historically been supplied by a vertically integrated utility which has been granted a geographic monopoly in exchange for explicit price regulation. Recently, policies have been enacted at the federal and state level to introduce competition into the wholesale supply of electricity. These efforts at regulatory restructuring are motivated by the belief that independent power producers (IPPs) reacting to market signals can better provide new generation capacity than a vertically integrated utility reacting to regulator-determined signals. This dissertation presents two essays that explores such a claim by examining the impact of regulatory restructuring on the observed economic behavior of IPPs. The first essay analyzes the relationship between the reported characteristics of an electric utility and the decision of its parent company to participate in independent power production. By combining utility data obtained from FERC Form 1 reports with IPP data from various industry sources, the essay examines the degree to which differences in utility O&M costs and financial characteristics can help explain observed differences in IPP activity across electric utility parent companies. Estimates based on a simple competitive entry model suggest that the main explanatory factors are those that reflect the utility's short-run variable cost from power plant operations, as opposed to capital access. The second essay proposes and estimates a dynamic structural model of IPP generation investment under regulatory uncertainty. The essay utilizes a panel dataset collected by the author that tracks the capacity accumulation decisions of 28 major IPPs in the 48 contiguous states from 1996 to 2000. The main implication of the model is that restructuring is associated with lower investment costs for IPPs. This effect, combined with regulatory uncertainty, appear to induce an option value for delaying investment, with IPPs willing to defer investment in markets likely to restructure in the near future. The estimated model also suggests that expected variable profits are higher under restructuring, although the precision of these estimates suggest that this result may not be economically important.