Impact of Deregulation on Cost Efficiency, Financial Performance and Shareholder Wealth of Electric Utilities in the United States

Abstract

In this dissertation, we evaluate the efficiency of electric utilities in the United States since 1997, and determine whether investor owned electric utilities (IOUs) and cooperatives (COOPs) achieve higher cost, technical and allocative efficiency and greater financial performance than publicly owned peer utilities (POUs). Our analysis includes the estimation of stochastic frontier production functions, Data Envelopment Analysis (DEA), the Juhn-Murphy-Pierce (JMP) cost decomposition and a modified three-factor French-Fama capital asset pricing model (CAPM), which includes technological and total factor productivity (TFP) change to measure firm efficiency. We find that electric utilities in states with electricity deregulation are characterized by greater increases in average costs than their peers in regulated states. Deregulation improved the TFP and the efficiency of IOUs and COOPs compared to their regulated peers and to POUs; stochastic frontier analysis corroborates this finding only for power generation in combination with increased market power in generation. The JMP cost decomposition shows that changes in observable prices and unobservable quantities and prices account for most of the changes in the differences in average costs at all levels of costs. Technological and TFP changes were not important determinants of stock performance for deregulated IOUs.