The Political Transaction Costs of Public Contracts: Empirical Evidence from the Us Electric Utility Sector Before and After the Deregulation

Abstract: Recent research suggests that public contracts can be expensive and inefficient compared to pure private contracts (Moszoro and Spiller 2014). This research studies empirically the intrinsic difference between public contracts and private contracts in the U.S. electric utility sector. Prior to the deregulation in 1996, the energy power market was dominated by vertically integrated utilities that perform three functions, i.e. electric generation, power transmission, and power distribution. After the deregulation, power generator and sales industries are being untangled from transmission and distribution services, with the presence of a high number of independent power producer (IPP). While de-integrated utilities might be necessary to foster competition and avoid monopolies, however, it may undermine the economies of coordination among vertical stages of electricity production. When utilities have to buy power from IPPs, they may face higher transaction costs due to the contractual relationships. This research assesses how the deregulation affects the economic performance of the investor-owned utilities (IOUs) and the publicly owned utilities (POUs) differently through the effect of transaction costs, i.e. the costs of doing a transaction with IPPs. This research will employ a two-stage empirical strategy. The first stage is to use data envelopment analysis (DEA) techniques to measure the output-oriented technical efficiency of the utilities. The second stage is to use difference-in-differences (DD) regression estimation to measure the differences in the economic performance of divesting IOUs and non-generator POUs compared to the vertically integrated IOUs and POUs. The difference will represent the treatment effect, in this case, the difference in transaction costs that the POUs and IOUs faced due to the deregulation.