Regulatory Effectiveness in The Electric Utility Industry: An Empirical Analysis

An established result in the theory of the regulated firm is that an effective rate-of-return constraint induces the firm to employ larger proportions of capital inputs to noncapital inputs than would be the case in the absence of the regulatory constraint. This overcapitalization, often referred to as the Averch-Johnson effect, has been the subject of several recent empirical studies of the electric utility industry. The present study adds to this body of literature. It seeks to test for the effectiveness of utility regulation in the context of a cost minimization model which includes the allowed rate of return as an explanatory variable and permits arbitrary elasticities of substitution for any pair of inputs