Regulatory Capture in a Resource Boom

Timothy Fitzgerald (Texas Tech University)

Abstract : State oil and gas regulators may be susceptible to capture by developing firms, especially during booms of resource development. Using data from state regulation to prevent waste in North Dakota, I provide empirical evidence that regulators serve well-organized interests in preference to diffuse general interests. The empirical analysis provides novel evidence of the mechanisms for regulatory capture by showing differences in regulatory responses across firms and locations.

Government Versus Market-based Allocation of Resources: Evidence from India’s Coal-fired Power Plants

Akshaya Jha (Carnegie Mellon University)

Abstract : Market-based mechanisms for allocating resources are known to have efficiency benefits relative to command-and-control based allocation rules. However, government allocation of resources may be preferable in contexts where there are significant economies to scale or significant external costs. I study this trade-off for the government allocation of coal to India’s power plants for the sample period 2008-2015. I show that, relative to state-owned power plants, privately owned power plants: 1) import a higher percentage of their input coal, 2) are more likely to run out of coal to burn, and 3) are more likely to curtail their electricity generation due to these coal shortages. I present empirical evidence that this inefficient allocation of coal results in higher total fuel consumption for the same level of electricity generation, higher electricity market prices and lower system-wide reliability. This suggests that the government-based allocation of coal increases the system-wide costs of generating electricity without reducing the electricity prices paid by consumers or improving the reliability of electricity supply.

Innovation, Interconnection, and Institutions: Evolving Electric Power Systems in the Early 20th Century

Lynne Kiesling (Northwestern University)
Karen Clay (Carnegie Mellon University)

Abstract : This paper examines the evolution of electric power systems from their earliest days in the 1880s through World War II and the barriers to achieving a large-scale integrated system. In the very earliest days of electricity, there were no gains to interconnection into large-scale integrated systems. Beginning some time around World War I, large-scale integrated systems would have offered lower cost and higher reliability. Coordination costs and the transactions costs created by the adoption of state public utility commissions acted as barriers to achieving this. World War I generated electricity demand far outstripping supply in some locations such as Buffalo and Pittsburgh. The problems associated with excess demand led the military to intervene. Military engineers worked with electricity companies to rationalize generation, interconnect transmission networks, and plan new investment so that war-related production could be maximized. Military intervention temporarily lowered the coordination costs and transaction costs associated with state public utility commissions and allowed regional interconnection in selected areas. Although some further interconnection did occur in the 1920s and 1930s, often through regional holding companies, state regulation and the financial excesses of the holding companies proved to be a barrier to large-scale regional integration. Transactions costs fell again in the lead up to World War II, when mounting war-related demand for electricity and a southern drought led to creation of a seventeen state power pool. The tension between regulation-induced transaction costs and coordination costs and the benefits of interconnection persists to this day.

Small-tract Mineral Owners Vs. Producers: the Unintended Consequences of Well-spacing Exceptions

Reid B. Stevens (Texas A&M University)

Abstract : Texas oil and gas law protects mineral owners with well-spacing regulations that prohibit drilling wells near property boundaries. However, the state can grant a well-spacing exception to a producer that is unable to negotiate a lease with a mineral owner for any reason, which allows the producer to drill close enough to the unleased property boundary to capture oil and gas under the property. A simple model of lease negotiations shows that well-spacing exceptions cause mineral rights owners to accept lower royalty rates from producers, since producers could drain oil and gas from the land without compensation if lease negotiations are unsuccessful. I estimate the effect of well spacing exceptions on royalties using an instrumental variables model, instrumenting for well spacing exceptions with distance from the proposed well to Austin, Texas, where mineral rights owners must travel to protest a spacing exception. I find that small-tract mineral owners accept lower royalty rates after well-spacing exceptions are granted nearby.