Deregulation, Restructuring and Changing R&D Paradigms in the US Electric Utility Industry

Abstract

This paper studies the impact of deregulation and competition on research and development (R&D) expenditures of investor owned utilities. The differing pace of deregulation in the fifty states provides heterogeneity in institutional structure and competitive forces, and showcases the response of R&D funding to changing institutional environments. Based on a panel of all major investor-owned utilities from 1989-1997, this paper analyzes various political constraints, institutional change, and firm-specific financial and structural factors that have contributed to the decline of R&D expenditure in the US electric utility industry. Total R&D expenditure is then disaggregated to internal and collaborative R&D spending and the relative effect of deregulation on these components is studied. A variation of the Heckman two-stage model is estimated in a panel data setting, allowing for separate effects of selection and intensity. The primary findings are: First, the uncertainty associated with the deregulatory process is responsible for the 46 percent decline in R&D expenditures between 1993 and 1997; rather than increasing competition in the retail market. Second, the response of R&D to financial and other firm attributes varies with the state of deregulation and provides insights into firm behavior in a regulated context. Third, the institutional and competitive factors interact in a way that suggest that full deregulation, coupled with effective retail competition may mitigate the problem of declining electricity R&D by the utilities.