Cost savings and deregulation: an analysis of fuel cost savings in deregulated electricity markets

ABSTRACT

Unregulated utilities face competitive pressures that lead to cost-minimizing activities, but regulated monopolies in the US electricity generation sector face pressures only from regulators who must balance a desire for lower prices against the need for the utility to generate a sufficient return to encourage investment. This paper analyses the cost-minimizing behaviours of regulated utilities by comparing their average input coal costs with those of deregulated utilities purchasing coal from the same mine during the same month of the same year. Results indicate that coal-fired electric plants operating in deregulated electricity markets negotiate prices that are 6.1 ¢/MMBtu (3.5%) less than their regulated counterparts. In percentage terms, this is a fairly small discount for deregulated plants, but it happens to be on par with the restructuring gains that others have estimated for labour and nonfuel costs.

KEYWORDS:

• Deregulation
• electric utilities
• coal mines
• cost minimization

JEL CLASSIFICATION:

• L43
• L14
• L94

Acknowledgements

The authors are grateful to the US Energy Information Administration for providing access to confidential data on coal mine-mouth prices. Joseph Conklin and Jacob Bournazian were particularly helpful with data access and disclosure review.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Price data is downloadable online for regulated utilities, but deregulated electricity plants’ coal prices are not publicly available due to confidentiality concerns.