An Analysis of Cost Structures in the Electricity Generation Industry

This paper provides up to date firm level analysis of the production technology and cost structures in the U.S. electric power generation industry. The paper applies an econometric approach into a dual restricted variable cost function within a “temporal equilibrium” framework. The Generalized Method of Moments (GMM) estimation is used to estimate the cost structures in the electric power generation industry. This paper is empirically implemented using a panel data (1986-1998) on 32 nuclear power generations for major investor owned utilities. The major result indicates that most of electric utilities in the nuclear electricity generation industry overutilized capital in production over time. Technological progress may have slowed over the sample period of this study. The results also show that electric utilities with small generation were operating at decreasing returns to scale whereas those with large generation were operating at increasing returns to scale in the production of the electricity industry in the sample data.