ECO435
Public Utilities Economics
Syllabus
Spring, 2015
Dr. Adrienne Ohler
Office: Stevenson 426F
Phone: 438-7892
E-mail: aohler@ilstu.edu
Office Hours: 10 -12 Tuesdays and Thursdays and by Appointment
REQUIRED TEXT:
Sandford V. Berg and John Tschirhart, Natural Monopoly Regulation: Principles and Practice
(Cambridge University Press, 1988).
Recommended Text:
Johnathan A. Lesser and Leonardo R. Giacchino, Fundamentals of Energy Regulation, (Public
Utilities Report, Vienna, Virginia, 2007).
ATTENDANCE POLICY: Attendance is required.
PREREQUISITES: ECO 335 and ECO 440
COURSE GRADE:
There will be two midterm exams and a final. Seven presentations will be given throughout the
semester. A paper will be due towards the end of the semester. The topic must be approved by the
instructor in advance. Every student is required to present an oral report during the semester. Guidelines
and due dates on the paper and oral presentation are provided below.
Students are expected to attend the Institute for Regulatory Policy Studies' Spring Conference.
Transportation and more information will be provided later.
The final grade will be based on the following point scheme:
Midterm #1
100 points
Midterm #2
100 points
Presentations
50 points
Class Presentation
50 points
Paper
100 points
Final
100 points
The following point scale will be used to evaluate your performance:
Grade
Total Points
A
450 or above
B
400 or above
C
350 or above
D
300 or above
F
less than 300
COURSE GOAL AND OBJECTIVES: This course covers the theoretical literature of the regulation
of natural monopoly and selected empirical applications of the theoretical models and techniques.
Students will also learn the actual institutions and methods of public utility regulation with a special
ECO435
Public Utilities Economics
Syllabus
Spring, 2015
emphasis on the recent regulatory and structural changes in the electricity, natural gas and
telecommunications industries
MISSING AND LATE POLICY: All assignments are due by 5pm on Friday. Paper assignments are
due electronically. No credit will be given for late assignments. Make-up exams may be given to those
only in EXTREME circumstance who discuss the emergency with me before the exam date.
POLICY ON CELL PHONES AND OTHER ELECTRONIC DEVICES: Cell phones must be
turned off before you enter the classroom. I will not tolerate the use of cell phones, e.g., voice or text
messaging, during class under any circumstances.
EXTRA CREDIT: No additional extra credit will be offered. Please don’t ask.
Disability Resource Accommodation: Reasonable accommodations are available for students who
have a documented disability. Please notify the instructor the first week of class of any accommodations
needed for the course. Late notification may cause the requested accommodations to not be available.
Any student needing to arrange a reasonable accommodation for a documented disability should
contact Disability Concerns at 350 Fell Hall, 309-438-5853, or visit the website
at http://disabilityconcerns.illinoisstate.edu/
Academic Honesty:
Cheating, plagiarism, collusion, abuse of resource materials, and their consequences are defined and
described in ISU Undergraduate Catalog 2008-2010, Section: Academic Policies and Practices, Article:
Academic Integrity (Page 57) and Code of Student Conducts under X.C. Disciplinary Bodies And
Procedures -- Academic Honesty Cases.
Disclaimer:
This syllabus is subject to change to facilitate instructional and/or student needs.
COURSE OUTLINE
Week Date Material
1
1/12 Introduction and Overview - Chapter 1
Why We Regulate.
1/14 The Natural Monopoly – Chapter 2
Testing for natural monopolies and competition
2
1/19 MLK, Jr.’s Day – No Class
1/21 Second Best Linear Pricing -Sections 3.1, 3.2
and 3.5
3
4
5
1/26
1/28
2/2
2/4
2/9
Presentations 1 – Industry At A Glance
Presentations 1 – Industry At A Glance
Fully Distributed Cost Pricing – Section 3.6
Second Best Non-linear Pricing - Sections 4.1,
4.2 Two-Part Tariff Model
Presentations 2 – Testing for subadditivity,
Testing for Economies of Scale, MC pricing
Action Items
Paper Proposal Due 1/23
Presentation
Presentation
Paper Intro Due 2/6
Presentation
ECO435
2/11
6
2/16
2/18
Public Utilities Economics
Syllabus
Presentations 2 – Testing for subadditivity,
Testing for Economies of Scale, MC pricing
Pareto-superior two-part tariff, Multi-part
pricing - Section 4.5, 4.6
Presentations 3 – Second Best Pricing
2/23
2/25
3/2
3/4
3/9
3/11
3/16
3/18
3/23
3/25
Presentations 3 – Second Best Pricing
12
3/30
13
4/1
4/6
Rate-of-Return Regulation - Sections 8.2, 8.3
and 9.1
Stochastic Demand - Section 6.1
Presentations 6 – Rate of Return OR Real Time
Pricing
Presentations 6 – Rate of Return OR Real Time
Pricing
Alternative to Regulation and Deregulation Sections 12.1, 12.2
Exam 2
Presentations 5 or 7 – Current Industry
Problems or Incentive Regulation, Deregulate,
Why Regulate?
Presentations 5 or 7 – Current Industry
Problems or Incentive Regulation, Deregulate,
Why Regulate?
Presentations
Presentations
7
8
9
10
11
4/8
14
4/13
15
4/15
4/20
4/22
16
17
4/27
4/29
TBD
Exam 1
Spring Break
Spring Break
Peak Load Pricing – Chapter 5
Peak Load Pricing – Chapter 5
Presentations 4 – Peak Load Pricing
Presentations 4 – Peak Load Pricing
Spring, 2015
Presentation
Presentation, Paper Outline
Due 2/21
Presentation
Paper Rough Draft Due 3/7
Presentation
Presentation, In Class
Feedback Due
Presentation
Presentation, Paper Revisions
#1 Due 4/11
Presentation
Presentation
Final Paper Due 5/8
I.
Presentation 1 - An Overview of the Traditional Utility Industries and Restructuring
Loomis (2008), “The Telecommunications Industry” in Hossein Bidgoli (ed.) The Handbook of
Computer Networks, Volume 1, Hoboken, NJ: John Wiley & Sons
Steinhurst (2011), “The Electricity Industry At a Glance,” NRRI Discussion Paper
Costello (2010) “The Natural Gas Industry at a Glance,” NRRI Discussion Paper
Denig-Chakroff (2008) “The Water Industry at a Glance,” NRRI Discussion Paper
ECO435
Public Utilities Economics
Syllabus
Spring, 2015
Hempling, Scott (2009) “Multi-Utility Issues at a Glance,” NRRI Discussion Paper
II.
Presentation 2 – Testing for Subadditivity and Marginal Cost Pricing
Shin and Ying (1992), "Unnatural Monopolies in Local Telephone," Rand Journal of Economics, 23:
171-183.
Gilsdorf (1995), "Testing for Subadditivity of Vertically Integrated Electric Utilities," Southern
Economic Journal, 62:126-138.
Sing, Merrile (1987), “Are Combination Gas and Electric Utilities Multiproduct Natural Monopolies?”
The Review of Economics and Statistics 69 (3): 392-398.
Fetz, Aurelio, and Massimo Filippini (2010) “Economies of vertical integration in the Swiss electricity
sector.” Energy Economics 32 (6): 1325-1330.
Davis, Lucas and Erich Muehlegger. (2010) “Do Americans consume too little natural gas? An
empirical test of marginal cost pricing.” RAND Journal of Economics 41.4: 791-810.
Christensen, Laurits, and William Greene (1976) “Economies of Scale in U.S. Electric Power
Generation” The Journal of Political Economy 84 (4): 655-676
Carlin, Alan, and R.E. Park (1970) “Marginal Cost Pricing of Airport Runway Capacity.” The American
Economic Review 60.3: 310-319
Renzetti, Steven (1999) “Municipal Water Supply and Sewage Treatment: Costs, Prices, and
Distortions”, The Canadian Journal of Economics 32.3: 688-704
III.
Presentation 3 - Second-Best Pricing: Ramsey Pricing and Fully Distributed Cost Pricing
Kim, H. Youn (1995) “Marginal Cost and Second-Best Pricing for Water Services” Review of
Industrial Organization. 10: 323-338
Sherman, R. and George, A. (1979) “Second-Best Pricing for the US Postal Service.” Southern
Economic Journal. 45 (3): 685-695.
Oum, T.H. and Tretheway, M.W. (1988) “Ramsey Pricing in the Presence of Externality Costs.”
Journal of Transport Economics and Policy. 22 (3): 307-317.
Matsukawa, Isamu, Seishi Madono, and Takako Nakashima. (1993) “An Empirical Analysis of Ramsey
Pricing in Japanese Electric Utilities.” Journal of the Japanese and International Economies 7: 256-276.
Hakimov, Rustamdjan, and Juergen Mueller. "Charges of uncongested German airports: Do they follow
Ramsey pricing scheme?." Research in Transportation Economics 45 (2014): 57-65.
Morrison, Steven A. "The structure of landing fees at uncongested airports: an application of Ramsey
pricing." Journal of Transport Economics and Policy(1982): 151-159.
ECO435
Public Utilities Economics
Syllabus
Spring, 2015
Ross, Thomas W. "Uncovering regulators' social welfare weights." The RAND Journal of
Economics (1984): 152-155.
DeLorme Jr, Charles D., David R. Kamerschen, and Herbert G. Thompson Jr. "Pricing in the nuclear
power industry: Public or private interest?." Public Choice 73.4 (1992): 385-396.
Garcia, Serge, and Arnaud Reynaud. "Estimating the benefits of efficient water pricing in
France." Resource and energy economics 26.1 (2004): 1-25.
IV.
Presentation 4 – Two-Part Tariffs
Calem, Paul and Daniel Spulber. (1984) “Multiproduct Two Part Tariffs” International Journal of
Industrial Organization. 2: 105-115.
Oi (1971), "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," Quarterly
Journal of Economics, 85:77-96.
Borenstein, Severin and Lucas W. Davis (2010) “The Equity and Efficiency of Two-Part Tariffs in the
U.S. Natural Gas Markets” NBER Working Paper
Naughton, Michael. (1989) “Regulatory Preferences and Two-Part Tariffs: The Case of Electricity.”
Southern Economic Journal 55 (3): 743-58.
Klein, Christopher C., and George H Sweeney. "Regulator preferences and utility prices: evidence from
natural gas distribution utilities." Energy Economics 21.1 (1999): 1-15.
Schefter, John E., and Elizabeth L. David. "Estimating residential water demand under multi-part tariffs
using aggregate data." Land Economics (1985): 272-280.
Nauges, Céline, and Alban Thomas. "Privately operated water utilities, municipal price negotiation, and
estimation of residential water demand: the case of France." Land Economics (2000): 68-85.
V.
Presentation 5 – Current Industry Problems
Lim, Seul-Ye, and Seung-Hoon Yoo. (2013) “The Impact of Electricity Pricing Changes on Industrial
Prices and the General Price Level in Korea.” Energy Policy 61: 1551-55.
Webster, Allan, and Sukanya Ayatakshi. (2013) “The Effect of Fossil Energy and Other Environmental
Taxes on Profit Incentives for Change in an Open Economy: Evidence from the UK.” Energy Policy 61:
1422-31.
Heeter, Jenny and Lori Bird (2013) “Including Alternative Resources in State Renewable Portfolio
Standards: Current Design and Implementation Experience.” Energy Policy 61: 1388-89.
Puller, Steven L. "Efficient retail pricing in electricity and natural gas markets."The American Economic
Review 103.3 (2013): 350-355.
Chermak, Janie M., et al. "Moving forward by looking back: comparing laboratory results with ex ante
market data." Economic Inquiry 51.1 (2013): 1035-1049.
ECO435
Public Utilities Economics
Syllabus
Spring, 2015
Beecher, Janice A., and Jason A. Kalmbach. "Structure, regulation, and pricing of water in the United
States: A study of the Great Lakes region." Utilities Policy 24 (2013): 32-47.
Huang, Ming-Yuan, et al. "Is the choice of renewable portfolio standards random?." Energy
Policy 35.11 (2007): 5571-5575.
Any paper from Energy Policy, the Electricity Journal, or the Economics of Energy & Environmental
Policy after 2010 related to the three industries we are studying.
Presentation 6 – Peak Load Pricing Models and Real Time Pricing OR Rate-of-Return
Regulation
Wenders, John T. (1976) “Peak Load Pricing in the Electric Utility Industry.” The Bell Journal of
Economics 7 (1): 232-241.
VI.
Hausman, J.A. et al (1979) “A Two-Level Electricity Demand Model: Evaluation of the Connecticut
Time-of-Day Pricing Test.” Journal of Econometrics 10 (3): 263-289.
Herriges, Joseph A. et al (1993) “The Response of Industrial Customers to Electric Rates Based Upon
Dynamic Marginal Costs.” The Review of Economics and Statistics 75 (3): 446-454.
Matsukawa, Isamu. "Household response to optional peak-load pricing of electricity." Journal of
Regulatory Economics 20.3 (2001): 249-267.
Faruqui, Ahmad, and Sanem Sergici. "Household response to dynamic pricing of electricity: a survey of
15 experiments." Journal of Regulatory Economics38.2 (2010): 193-225.
Di Cosmo, Valeria, Sean Lyons, and Anne Nolan. "Estimating the impact of time-of-use pricing on Irish
electricity demand." (2012).
Joskow, Paul (1972) “The determination of the allowed rate of return in a formal regulatory hearing”
Bell Journal of Economics, 3.2: 632-644.
Hayashi, Paul and John Trapani. (1976) “Rate of Return Regulation and the Regulated Firm's Choice of
Capital-Labor Ratio: Further Empirical Evidence on the Averch-Johnson Model” Sourthern Economic
Journal 42.3: 384-398.
Hayashi, Paul, Melanie Sevier, and John Trapani. (1985) “Pricing Efficiency under Rate-of-Return
Regulation: Some Empirical Evidence for the Electricity Utility Industry.” Southern Economic
Journal. 51 (3): 776-792
Courville, Leon. (1974) “Regulation and Efficiency in the Electric Utility Industry.” The Bell Journal
of Economics and Management Science. 5(1): 53-74.
Ohler, Adrienne (2013) “Behavior of the Firm under Rate-of-Return Regulation with Two Capital
Inputs.” The Quarterly Review of Economics and Finance
ECO435
Public Utilities Economics
Syllabus
Spring, 2015
Spann, Robert M. "Rate of return regulation and efficiency in production: An empirical test of the
Averch-Johnson thesis." The Bell Journal of Economics and Management Science (1974): 38-52.
Sherman, Roger. "The Averch and Johnson analysis of public utility regulation twenty years
later." Review of Industrial Organization 2.2 (1985): 178-193.
Tahvanainen, Kaisa, et al. "Experiences of modern rate of return regulation in Finland." Utilities
Policy 21 (2012): 32-39.
Crew, Michael A., and Rami S. Kahlon. "Guaranteed return regulation: a case study of regulation of
water in California." Journal of Regulatory Economics46.1 (2014): 112-121.
VII.
Presentation 7 – Incentive Regulation, Deregulate, Why Regulate?
i) Incentive Regulations
Joskow and Schmalensee (1986), "Incentive Regulation for Electric Utilities," Yale Journal
on Regulation, 4: 1-49.
Vogelsang, Ingo (2002), “Incentive Regulation and Competition in Public Utility Markets: A
20 Year Perspective,” 22 (1): 5-27
Braeutigam, Ronald R., and John C. Panzar. "Effects of the change from rate-of-return to
price-cap regulation." The American Economic Review (1993): 191-198.
Liston, Catherine. "Price-cap versus rate-of-return regulation." Journal of Regulatory
Economics 5.1 (1993): 25-48.
ii) Deregulation
Kwoka, John. (2008) “Restructuring the U.S. Electric Power Sector: A Review of Recent
Studies.” Review of Industrial Organization 32:165-196.
Brennan, Timothy, Karem Palmer, and Salvador Martinez. (2002) “Implementing Electricity
Restructuring.” Environmental and Resource Economics 22: 99-132.
Borenstein, Severin. (2002) “The Trouble with Electricity Markets: Understanding
California’s Restructuring Disaster.” The Journal of Economic Perspectives. 16(1): 191211.
iii) Why Regulate?
Demsetz, Harold. (1968) “Why Regulate Utilities?” Journal of Law and Economics 11(1):
55-65
Joskow, Paul. (1981) “Regulation in Theory and Practice: An Overiew” Studies in Public
Regulation MIT Press: 1-78.
Smyth Russel. (2010) “Public interest versus regulatory capture in the Swedish electricity
market.” Journal of Regulatory Economics. 38:292-312.