Center for the Study of Energy Markets

In this paper, we examine the issue of why some parent companies of U.S. electric utilities have expanded into domestic independent power production (IPP) but not others. We evaluate the conjecture that the parent companies who have chosen to participate in recently restructured U.S. wholesale electricity markets are those with the most generation cost advantages. Specifically, we empirically investigate the link between apparent advantages in two types of generation costs, operation & maintenance (O&M) and capital, and the IPP participation decision. We use electric utility data from FERC Form 1 and combine it with IPP data collected from various industry sources. The data is analyzed using both a descriptive approach and the estimation of a simple competitive entry model. The results indicate that utility parent companies that expand into domestic IPP do tend to have much lower reported utility generation O&M costs. Moreover, they also tend to have divested some of their own utility power plants. The former provides some hope that restructuring is having the desired entry/exit effect while the latter raises some concerns about power plant "swapping" among utilities. Other measures capturing the financial health of the utility parent company seem to have little explanatory power, after controlling for other benefits stemming from utility scale of operation.