Appendix : Testing the Independence of Future Electricity Production
Levels and the Compliance Decision
I cannot directly observe plant managers’ expectations regarding ozone season produc-
tion levels Qn under different compliance strategy scenarios. In the paper, I assume
that managers used past summer production levels to proxy for expected ozone season
production. This assumption is supported by production costing models of electric-
ity dispatch under NOx regulation (Leppitsch and Hobbs) and anecdotal evidence
that managers used past summer capacity factors to estimate future production lev-
els when choosing how to comply with the SIP Call, independent of the compliance
choice being evaluated (EPRI,1999).
Let Qn represent the nth unit’s average production in past ozone seasons. I now
assume:
Qni = Q n + ʌnp (10)
where ʌ^ is the difference between the unit’s historic average ozone season production
and its the quantity of electricity that the nth unit expects to produce in an average
ozone season, conditional on adopting compliance strategy i (Qni). For a baseload
unit with relatively low operating costs serving either a restructured or more regulated
electricity market, we can assume that ʌ^ = 0 V i. For units with higher operating
costs, however, future electricity production levels could be affected by the compliance
choice, and it is conceivable that managers took this into account in their compliance
decisions.
In the analysis presented in the paper, I assume ʌn = 0 for all firms, for all
compliance choices. One way to empirically test the validity of this assumption is
to test whether firms’ production levels changed significantly once the NOx SIP Call
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