Efficiency and Trade Network Analysis of the Electricity Market: 1985-2005

This paper proposes an econometric model that explains the efficiency of electric power plants between the years 1985 and 2005, and also builds a network among the different states based on fuel trade during the period 1990 to 2005 to evaluate the dynamic relationship among efficiency, technology adoption and the following variables: the corporate decision to acquire emission abatement technology, prices and quantities of low and high sulfur coal, SO_2 allowances prices, and the operation and maintenance cost of abating technology. This paper concludes that firms respond to the imposition of pollution control regulations such as the Clean Air Act (CAA) by selecting an efficient strategy that simultaneously control emissions and minimize costs. Efficiency increases when more sub-bituminous coal is used because of its lower level of emissions in comparison to bituminous coal and when the electricity sector is deregulated. An important factor that affects the use of coal is its cost. So, when the cost of sub-bituminous coal increases, we expect that less sub-bituminous coal is used and as a result both technical and scale efficiency decrease. Likewise larger plants are less efficient because of their restrictions to switch technology quickly and minimize costs. Technical efficiency has an important positive impact on the dynamic of the coal trade among states considering that electricity generating plants located closer to the Powder River Basin seem to benefit more of their proximity to major sub-bituminous sources.