The production inefficiency of US electricity industry in the face of restructuring and emission reduction

Abstract:
Purpose
The paper investigates the production inefficiency of the US electricity industry in the wake of restructuring and emission reduction regulations.

Design/methodology/approach
The study estimates a multiple-input, multiple-output directional distance function, using six inputs: fuel, labor, capital and annualized capital costs of sulfur dioxide (SO2), nitrogen oxides (NOX) and particulate removal devices, two good outputs – residential and industrial-commercial electricity and three bad outputs – SO2, carbon dioxide (CO2) and NOX emissions.

Findings
The authors find that restructuring in electricity markets improves deregulated utilities' technical efficiency (TE). Deregulated utilities with below-average NOX control equipment tend to invest less in these devices, but above-average utilities do the opposite. The reverse applies to particulate removal devices. The whole sample spends more on NOX, particulate and SO2 control systems and reduces its electricity sales slightly. Increased investments in SO2 and NOX control equipment do not reduce SO2 and NOX emissions, but expansions of particulate control systems cut down SO2 emissions greatly. Stricter environmental regulations have probably shifted the production frontier inwards and the utilities farther from the frontier over time.

Practical implications
Restructuring and environmental regulations do not make all utilities invest more in emission control systems. The US government should devise other schemes to achieve this goal.

Originality/value
The paper unveils heterogeneous reactions of US electric utilities in the wake of restructuring and emission regulations.