The effect of wholesale market deregulation on shareholder wealth in the electric power industry

This paper analyzes electric utility stock price reactions to events preced ing the passage of the Energy Policy Act of 1992, a development that precip itated the onset of competition in the wholesale sector of the electric uti lity industry and accelerated the pace toward state-level deregulation of t he retail sector. For the industry as a whole, we find that, at worst, inve stors had neutral reactions to events preceding wholesale deregulation. How ever, stock price reactions vary systematically with differences in incumbe nt utilities' marginal costs, though not with differences in fixed costs or purchased power costs. These results are consistent with the notion that n ew technologies have substantially reduced barriers to entry into the elect ric power generation industry, rendering capital cost advantages of incumbe nt utilities vulnerable to being neutralized by new entrants. However, marg inal cost advantages are more likely to be sustainable because they are lik ely to be driven by inimitable locational advantages.