Russell Rhine

Date of Graduation


Document Type



The following dissertation is the consolidation of three research projects in the U.S. electric utility industry. The first essay tests for scale economies in the electric utility industry using a panel data set of fossil fuel and nuclear fuel utilities. In addition, a variable cost function is used as opposed to a total cost function because the assumption of cost minimizing production inputs is not met. That is, electric utilities are overcapitalized. Therefore, the optimal capital stock is estimated and an estimate of economies of scale is generated. Evidence suggests that firms are operating on the negatively sloped portion of the long-run average cost curve near the trough. This indicates either slight economies of scale or no economies of scale. The results also shows that over the sample period the industry is moving away from a downward sloping longrun cost curve toward a flat cost curve. The second essay tests an expanded version of the Averch-Johnson model in an attempt to locate the source of overcapitalization in the U.S. electric utility industry. By including the portion of capital expenditures that were disallowed by regulators, the model indicates that firms with disallowed capital will overcapitalize to a greater degree than firms without disallowed capital. This model also predicts a positive relationship between the ratio of disallowed capital to total capital and overcapitalization. The empirical tests of the model show evidence supporting the theory. Thus, overcapitalization of electric utilities is due to regulatory influences and the overcapitalization is exacerbated by the disallowance of capital costs. The third essay answers two questions, whether the capital asset pricing model (CAPM) or the arbitrage pricing theory (APT) is theoretically more appropriate for use in the electric utility industry, and what is the sensitivity of research to the different asset pricing models. Theoretically the APT is more appropriate than the CAPM for this industry however, the CAPM performed better in forecasting a firms rate of return. The difference in forecasted rates of return did not have a significant effect on cost function estimated coefficients nor did they affect an economies of scale estimate.