Center for the Study of Energy Markets

Electric industry restructuring in the US has led to rapid and substantial changes in the ownership of the existing stock of electricity generating plants. Between 1998 and 2001, over 300 electric generating plants in the US, accounting for nearly twenty percent of the total generating capacity, changed hands. Moreover, because the new owners are unregulated, they face different incentives from the utilities that were operating plants under cost-of-service regulation and had weak incentives to control operating costs. We use data from several sources, most importantly information on fuel efficiency from the Environmental Protection Agency’s Continuous Emissions Monitoring System (CEMS), to investigate changes in operating efficiency at plants that have been divested from utility to non-utility ownership. We examine efficiency changes relative to a set of plants that were retained under utility ownership. Our results suggest that fuel efficiency improved by about 2% following divestitures, although nondivested plants that were subject to incentive regulation also saw fuel efficiency improvements of similar magnitudes. Our results suggest that changes in incentives were the main driver behind the efficiency improvements and that the ownership transfers had little positive and possibly negative impacts on fuel efficiency.