Governance Institutions and Outcomes
New Directions in Modern Economics series
Edited by Mehmet Ugur and David Sunderland
Chapter 9: The Political Economy of Deregulation in the US Gas Distribution Market
Vladimir Hlasny Since the late 1800s, regulation of public utilities in the United States has undergone many changes in structure and conceptual approach. The most recent upheaval took place in the early 1990s, when state-level public service commissions abandoned traditional cost-plus ratemaking regime for performance-based regulation. Some states fixed prices that utilities could charge, some introduced financial incentives for utilities to exceed certain performance standards, and others allowed utilities to compete among themselves for customers. Utilities went along with, if not welcomed, the changes. The first large incentive programs in the gas distribution industry were introduced 15 years ago, and many states have adopted them since then. As of 2007, half of US states and two-thirds of utilities still operated under rate-of-return regulation. To this day, motives behind regulatory reform across individual states remain unclear. Understanding them can help us determine the relative importance of legitimate economic factors, and of political capture motives, in bringing about policy reform. This understanding can also help us predict future patterns of deregulation. This chapter extends empirical evidence on factors behind regulatory reform in utility industries, using panel data on all natural-gas utilities in the continental United States. Among state-level political factors, frequency and timing of commissioner re-elections, system of selection of commissioners and party composition of the commissions and state legislatures are significant in explaining the pattern of deregulation. Demonstration effects from regulatory regimes in surrounding states and particularly from other utility industries in a state appear to play a role. A negative...
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