Governance structures and efficiency in the US electricity sector after the market restructuring and deregulation

In some U.S. states that have undergone electricity market restructuring and deregulation, investor-owned utilities (IOUs) were required to divest the majority of their generation assets in order to purchase power from merchant generators, independent power producers, and power marketers competing in the new wholesale market. This paper examines the effect of the governance structures used to purchase power in the wholesale market, the bilateral forward contracts and market transactions, on the technical efficiency of IOUs during the post-divestiture period. Using a two-stage empirical strategy (the non-parametric data envelopment analysis and the difference-in-differences regression approach), I analyze the performance of 152 distribution utilities in the U.S. from 1994 to 2015. The results show that while the use of contracts has no significant effect, the use of market transactions has a significant negative effect on IOU technical efficiency. Trading arrangements in the restructured wholesale markets that rely on the concept of competition generate transaction costs that make it more costly for the utility to use market transactions rather than other alternatives. Thus, market transactions fall short to promote the efficiency purpose of IOUs as an economic organization in this policy-induced market and the adverse effect persists until 20 years after the divestiture.