Ashley Langer from the University of Arizona will present "Energy Transitions in Regulated Markets" (joint with Gautam Gowrisankaran and Mar Reguant)
Regulated U.S. electricity markets have transitioned away from coal capacity more slowly than restructured markets. Observers have also alleged that regulated utilities are operating coal plants even when this is inefficient, to prove that they are prudent and avoid decommissioning. We develop and estimate a dynamic model of energy transitions in electricity markets that incorporates regulatory incentives. In our model, the regulator aims to provide the utility a fair rate of return on productive capital while keeping electricity rates low by limiting returns on capital when variable costs are high. The regulatory structure provides two opposite operating incentives: utilities will overuse expensive coal plants to meet the used-and-useful standard, but this overuse will be constrained to the extent that it results in high variable costs. In the long run, utilities make retirement decisions for older technologies and investment decisions for new technologies. We use our model to understand how alternative regulatory structures would affect generation costs, transitions to new energy sources, and pollution. We find that eliminating the used-and-useful standard would decrease coal utilization in 2006 by 34 percent. By 2033, a cost-minimizing social planner would on average have 28% less coal capacity than regulated utilities under the current regulatory regime.