Economics 435: Regulation of Public Utiliites

Syllabus

Dr. David Loomis

Office: STV 422D

Office Hours: MW 4-5 p.m. and by appointment

Phone: 438-7979

Email: dloomis@ilstu.edu

Course Prerequisites: ECO 335 and ECO 440

 

REQUIRED TEXT:

Sandford V. Berg and John Tschirhart, Natural Monopoly Regulation: Principles and Practice (Cambridge University Press, 1988).

This book is now out of print, but the authors have granted permission to copy selected portions of the text for classroom use.

Papers referenced in the syllabus will be on reserve in the library.

COURSE 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 emphasis on the recent regulatory and structural changes in the electricity, natural gas and telecommunications industries

 

COURSE REQUIREMENTS

There will be two midterm exams and a final. Homework assignments will be given throughout the semester. A paper will be due towards the middle 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 will be provided later.

 

Students are expected to attend the Institute for Regulatory Policy Studies' workshop titled "Bringing Retail Choice to Small Gas Customers in Illinois" on February 20, 1998 in Springfield, IL. 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
Homework 50 points
Class Presentation 50 points
Paper 100 points
Final 100 points

COURSE OUTLINE

I. Introduction and Overview

Berg and Tschirhart, Chapter 1

II. The Natural Monopoly Problem

Berg and Tschirhart, Sections 2.1, 2.2 and 2.5

III. An Overview of the Traditional Utility Industries

Economic Report of the President, 1996, Washington, D.C.: U.S. Government Printing Office, Chapter 6.

IV. The Tools of Welfare Analysis

Henderson and Quandt, Microeconomic Theory: A Mathematical Approach, pp. 49-52.
Willig (1976), "Consumer's Surplus without Apology," American Economic Review, 66:589-597.

V. Refining the Concept of Natural Monopoly

Berg and Tschirhart, Sections 2.3 and 2.4
Shin and Ying (1992), "Unnatural Monopolies in Local Telephone," Rand Journal of Economics, 23: 171-183.
Gilsdorf (1995), "Testing for Subadditivty of Vertically Integrated Electric Utilities," Southern Economic Journal, 62:126-138.

VI. Monopoly Pricing: Basic Concepts

Oi (1971), "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," Quarterly Journal of Economics, 85:77-96.

VII. Second-Best Linear (Uniform) Pricing

Berg and Tschirhart, Sections 3.1, 3.2 and 3.5
Kamerschen and Thompson, "Rate Structures in Nuclear and Non-Nuclear US Electric Utility Jurisdictions," Applied Economics, 27: 575-581.

VIII. Second-Best Nonlinear Pricing

Berg and Tschirhart, Sections 4.1, 4.2, 4.5 and 4.6

IX. Regulation in Practice: Rate-of-Return Regulation

Berg and Tschirhart, Section 3.6
Kaserman, Mayo and Flynn (1990), "Cross-Subsidization in Telecommunications: Beyond the Universal Service Fairy Tale," Journal of Regulatory Economics, 2: 231-249.

X. Rate-of-Return Regulation and Managerial Incentives: The Averch-Johnson Model

Berg and Tschirhart, Sections 8.2, 8.3 and 9.1
Courville (1974), "Regulation and Efficiency in the Electric Utility Industry," Bell Journal of Economics, 5: 53-74.

XI. Fluctuating Demand: Peak-Load Pricing

Berg and Tschirhart, Sections 5.2, 5.3 and 5.4

XII. Stochastic Demand: Reliability

Berg and Tschirhart, Sections 6.1, 6.2 and 6.4
Jaffe and Felder (1996), "Should Electricity Markets Have a Capacity Requirement? If So, How Should It Be Priced?" Electricity Journal, 9: 52-60.

XIII. Alternatives for Rate-of-Return Regulation

Berg and Tschirhart, Sections 12.1 and 12.2
Joskow and Schmalensee (1986), "Incentive Regulation for Electric Utilities," Yale Journal on Regulation, 4: 1-49.

XIV. Current Regulatory Policy Issues Confronting the Electric, Natural Gas and Telecommunications Industries

A. Stranded Cost in the Electric Industry

Baumol and Sidak (1995), "Stranded Cost Recovery: Fair and Reasonable," Public Utilities Fortnightly, May 15, pp. 20, 22-23.
Michaels (1995), "Stranded Investment Surcharges: Inequitable and Inefficient," Public Utilities Fortnightly, May 15, pp. 21, 24-25.
Joskow (1996) "Does Stranded Cost Recovery Distort Competition?" Electricity Journal, 9(3): 31-45.
Tye and Graves (1996), "Stranded Cost Recovery and Competition on Equal Terms," Electricity Journal, 9(10): 61-70.

B. Competition and Access to Essential Facilities

Hausman and Tardiff (1995), "Efficient Local Exchange Competition," Antitrust Bulletin, 40: 529-556.
Armstrong, Doyle and Vickers (1996), "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, 44: 131-150.
Baumol and Sidak (1994), "The Pricing of Inputs Sold to Competitors," Yale Journal on Regulation, 11: 171-202.

C. Domestic and International Telecommunications Deregulation

Harris and Kraft (1997), "Meddling Through: Regulating Local Telephone Competition in the United States," Journal of Economic Perspectives, 11(4): 93-112.
Spiller and Cardilli (1997) "The Frontier of Telecommunications Deregulation: Small Countries Leading the Pack," Journal of Economic Perspectives, 11(4): 127-138.
Waverman and Sirel (1997) "European Telecommunications Markets on the Verge of Full Liberalization," Journal of Economic Perspectives, 11(4): 113-126.