Regulation Stifles Technological Progress in Electric Utilities

Regulation can hinder technological progress by preventing companies from adapting to changing circumstances. This is especially true in industries where new technologies emerge rapidly, such as the electric utility sector.

A recent study published in the American Economic Review found that regulated markets are slow to handle change. The researchers analyzed data on coal plants and their operation in various states across the US.

The study found that utilities in regulated states tend to keep outdated power plants operational, even when it's no longer profitable. This is because regulators require utilities to demonstrate that their capital stock remains 'used and useful'. To do this, utilities may continue burning coal at a loss, rather than switching to cheaper natural gas.

In contrast, restructured states with competitive electricity markets were found to abandon outdated plants more quickly when costs exceeded prices. The study's authors conclude that regulation can lead to the accumulation of too much old capital and too much new capital, making it difficult for companies to adapt to changing circumstances.