Rate of return regulation and the Le Chatelier principle

Gerald Granderson () and Finn Førsund

Journal of Productivity Analysis, 2014, vol. 41, issue 2, 263-275

Abstract: This paper examines whether rate-of return regulation alters the input quantities firms use to produce their selected output level when the corresponding input prices change, in a manner similar to the Le Chatelier principle. More specifically, would the change in a rate regulated firm’s input quantity due to a change in its input price be less price elastic than the unregulated firm’s change in the input quantity due to a change in its input price. We follow Färe and Logan ( 1986 ), Nelson and Wohar ( 1983 ) in estimating a rate regulated cost function and capital input share system of equations. Using a 1992–2000 panel of 34 US major investor-owned electric utilities, empirical results indicate that the regulated own-input price elasticities of demand for labor and fuel are less price elastic than their corresponding unregulated own-input price elasticities of demand (a Le Chatelier principle type effect). Having a fuel clause (1) reduces the firm’s willingness to substitute from fuel to either non-fuel (capital, labor) input when the price of fuel rises, and (2) enhances the firm’s willingness to substitute from non-fuel inputs to fuel when the price of non-fuel inputs rises. Copyright Springer Science+Business Media, LLC 2014

Keywords: Regulation; Fuel adjustment clause; Le Chatelier principle; D24; L51 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11123-012-0300-4

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