Semester

Spring

Date of Graduation

2001

Document Type

Dissertation

Degree Type

PhD

College

Chambers College of Business and Economics

Department

Economics

Committee Chair

Stratford M. Douglas.

Abstract

The dissertation explores several issues that arise from the restructuring of the American electricity industry. The first chapter discusses economic reasons for deregulation, describes possible deregulation scenarios, and outlines potential pitfalls of deregulation.;Chapter 2 develops a forecast of electricity prices after the transition to retail competition. The equilibrium prices are found from an n -firm Cournot model of oligopoly with non-uniform marginal costs. It is further shown how the translog cost function can be used in the traditional solution of the Cournot model. Major empirical findings include marginal cost functions of every producer and forecast prices of electricity after deregulation in all the NERC regions of the U.S.;Chapter 3 presents an application of the theory of real options to the sales of power plants by the U.S. electric utilities. Observations of the divestiture transaction prices make it possible to infer expected future prices of electricity. It is found that under plausible assumptions prices for electricity have to be rather high for the owners of power plants to earn an attractive rate of return on their investments. Power plants divested by electric utilities, in general, have commanded high prices in the market, and the utilities selling them received generous compensation.;Chapter 4 examines the question why some electric utilities are willing to sell generation plants, while affiliates of other utilities are buying them. The study applies a method of joint estimation of risk preferences and costs to assess the nature of attitudes toward risk of the U.S. electric utilities. The estimates of absolute risk aversion, relative risk aversion, and downside risk aversion are obtained. The absolute majority of electricity producers have been found risk averse with decreasing absolute risk aversion (DARA) and increasing relative risk aversion (IRRA). All the firms have been found averse to downside risk. It was determined that buyers of power plants have statistically lower degree of relative risk aversion than the sellers, as well as the rest of the firms.;Chapter 5 provides a summary of the dissertation and discusses the directions of possible future research.

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