Center for the Study of Energy Markets

This paper uses data from the U.S. electric power industry to explore the strategic responses of regulated firms to government enforcement. We focus on the enforcement of New Source Review, a provision of the Clean Air Act that imposes stringent emissions limitations on substantially modified older power plants. Starting in late 1999, the EPA sued the owners of 46 power plants for NSR violations. This paper explores how electric utilities responded to both the perceived threat of future action, and the action itself. We find that the threat of action did have a significant effect on emissions: plants that were likely to be named in the lawsuits (as determined by our discrete choice model of the lawsuit decision) reduced their emissions by about 17 percent on the eve of the lawsuits. After the lawsuits, we find no significant difference between those plants sued and other relatively dirty coal-fired power plants.