Review of Industrial Organization 22: 313–331, 2003.
© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
An Empirical Analysis of Electricity Regulation on
Technical Change in Texas
MARK W. FRANK
Department of Economics and International Business, Sam Houston State University, P.O. Box
2118, Huntsville, Texas 77341-2118, U.S.A.
Phone: 936-294-4890; Fax: 936-294-3488; E-mail: firstname.lastname@example.org
Abstract. To evaluate the impact of regulation on the innovativeness of ﬁrms, this study considers
the unusual case of electric utilities in the state of Texas. In the current era of deregulation, the
electric utility industry in Texas is unique because its regulation was relatively limited until 1975,
after which time Texas legislators imposed rate-of-return regulation. Utilizing a translog cost frame-
work on annual data covering the years 1965 to 1985, this study is thus able to compare the rate of
technological change both before and after the imposition of rate-of-return regulation. The ﬁndings
indicate that before the implementation of rate-of-return regulation, costs decreased signiﬁcantly
because of technological progress. After the implementation, however, the ﬁndings indicate that costs
increased signiﬁcantly due to technological regress brought on by regulation.
Keywords: Regulation, technological change, rate-of-return, electric utilities, Texas.
JEL Classiﬁcation: L5, L9.
It is commonplace to analyze the implications of regulation from an interrupted
time series framework in which a historically regulated industry goes through a
process of deregulation. The actual implementation of deregulation may vary in
degree and velocity, but the causal ordering is the same: observations are col-
lected from a regulated industry, that industry encounters a deregulatory event,
after which time more observations are again collected. In the telecommunications
industry, for example, recent studies have indicated that deregulatory pricing ﬂex-
ibility has resulted in lower rates (Mathois and Rogers, 1989; Kaestner and Kahn,
1990), increased technical efﬁciency (Resende, 2000; Uri, 2001), and increased
product innovation (Greenstein et al., 1995; Prieger, 2001).
Similar results have
The author gratefully acknowledges the assistance and helpful comments of Barry J. Seldon,
Brian J. L. Berry, Denise R. Frank, Euel Elliot, Donald G. Freeman, and James C. Murdoch. Parts of
this work are based on my dissertation (Frank 2000). All errors remain my responsibility.
For a survey of these empirical ﬁndings, see Kridel et al. (1996).