The governance of transactions: Joskow's coal-burning generating plants example revisited

In a classical paper, Joskow (1985, Journal of Law, Economics and Organizat ion 1(1), Fall, 33-80) discussed governance mechanisms for transactions bet ween coal suppliers and electric power companies: vertical integration, lon g-term and short-term contracts. According to the foundations of Transactio n Cost Economics, vertical integration and long-term contracts would be the most probable outcome when a coal-burning generating plant requires durabl e transaction-specific investments - a mine-mouth plant is an extreme situa tion. This hypothesis is evaluated in the Spanish context, through a case s tudy of 14 power plants located in coalfields and which have historically h ad poor transportation infrastructure. The analysis shows that the role pla yed by long-term contracts in Joskow's US example, was taken in Spain by St ate interventionist arrangements established to promote thermoelectric deve lopment in the coalfields. Such arrangements induced electric utilities to carry out specific investments whose only guarantee was a tacit commitment to recovery through regulation. These plants would have become stranded in a pure competitive scenario. So the government - accepting the implicit con tract argument - recognised the value of these stranded investments within a highly controversial package of transition costs, in the process of liber alising the electricity industry. (C) 2000 Elsevier Science Ltd. All rights reserved.