From Investor-owned Utility to Independent Power Producer

Abstract

We examine the issue of why some parent companies of U.S. electric utilities have expanded into domestic independent power production (IPP) but not others. We evaluate the conjecture that the parent companies who have chosen to participate in recently restructured U.S. wholesale electricity markets are those with the most generation cost advantages. Specifically, we empirically investigate the link between apparent advantages in two types of generation costs — operation &maintenance (O&M) and capital — and the IPP participation decision. We use electric utility data from FERC Form 1 and combine it with IPP data collected from various industry sources. The data is analyzed using both a descriptive approach and a simple, empirical competitive entry model. We find that utilities with lower O&M costs are more likely to expand into IPP. Also, utility financial characteristics, reflecting possible capital cost advantages, seem to matter mainly for the largest utilities.