Journal of Productivity Analysis

, Volume 39, Issue 3, pp 243–257 | Cite as

Environmental externalities and regulation constrained cost productivity growth in the US electric utility industry

Article
First Online:

Abstract

This paper examines whether having to comply with Phase 1 of Title IV of the 1990 Clean Air Act, and rate of return regulation, each impacted the rate of total factor productivity (TFP) growth when accounting for the production of good and bad outputs. Phase 1, effective from 1995 to 1999, requires electric utilities to reduce their emissions of sulfur dioxide and nitrogen oxide (bad outputs). Actions undertaken to reduce the emissions (using less sulfur content coal, installing equipment), may have led to higher production costs, and impacted the rate of TFP growth. Rate regulation may impact how the firm produces its selected output level, which could lead to higher cost over time, and biased estimates of TFP growth. Following the work of Ball et al. (Struct Change Econ Dyn 16(3): 374–394, 2005), who developed the standard Malmquist cost productivity (MCP) index, we develop a MCP index for a rate regulated firm (RMCP index) then use the standard and regulated indices to determine whether having to comply with Phase 1 impacted TFP growth. Empirical results indicate that (i) the RMCP index underestimated the rate at which TFP growth occurred, (ii) Phase 1 utilities on average experienced positive TFP growth from 1996 to 2000 (Phase 1 firms experienced higher TFP growth rates than the rates experienced by firms not subject to Phase 1), and operated more allocatively inefficient in complying with the Phase 1 restrictions. Complying with Phase 1 did not affect the rate at which technical change occurred or the rates of change in scale efficiency.

Keywords

Regulation Productivity growth Clean Air act 

JEL Classification

D24 L94 
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Notes

Acknowledgments

We are grateful to Jennifer Shand and Sean Delehunt for their assistance in compiling the data, and to participants at the 10th European Workshop on Efficiency and Productivity Analysis, in Lille (France) for their comments and suggestions. Diego Prior acknowledges the financial support of the Spanish Department of Science and Technology (Plan Nacional de Investigación Científica, Desarrollo e Innovación Tecnológica 2008-2011, Code: ECP2010-18967).

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Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Department of EconomicsMiami UniversityOxfordUSA
  2. 2.Department of Business EconomicsUniversitat Autonoma de BarcelonaBarcelonaSpain

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