Impact of regulation on vertical integration in the electric industry

The purpose of this paper is to determine the factors which affect electric utilities’ dicisions about whether to vertically integrate into coal. Specifically, we attempt to determine whether variation in the stringency of regulation will affect the probability of vertically integrating. Public Service Commissions allow, to one degree or another, utilities to pass along fuel adjustment charges to customers. Other factors equal, we hypothesize that the larger the fuel adjustment charge allowed per KWH, and the less stringent the PSC’s regulaton of transfer pricing of fuel, the higher will be the probability of vertically integrating into coal to capture rents. A maximum likelihood logit model is specified and estimated; strong support is offered for the theory.