Notes
1Department of Agricultural and Resource Economics and the University of California Energy
Institute. I would like to thank Severin Borenstein, Michael Hanemann, Guido Imbens, Jeffrey
Perloff and Catherine Wolfram for helpful suggestions. I am indebted to Ed Cichanowicz, Bonnie
Courtemanche, Joe Diggins, Nichole Edraos, Thomas Feeley, Richard Himes, Allan Kukowski, Bruce
Lani, Dan Musatti, John Pod, Galen Richards, David Roth, Ravi Srivastava, Donald Tonn, Chad
Whiteman and David Wojichowski for providing data and helping me understand the technical
side of electricity generation and NOx control; without their help, this project would not have been
possible. I also thank the UC Energy Institute for financial support. All remaining errors are mine.
2All of the emissions regulated under the Acid Rain Program and over 90% of the emissions
regulated under the NOx SIP Call come from electricity generators. The mercury cap and trade
program laid out in the EPA’s mercury rule, published in May 2005, applies exclusively to the
electricity sector.
3The paper focuses exclusively on the compliance decisions of coal-fired electricity generators.
Although only 31% of the units regulated under the SIP Call are coal plants, the majority of the
point source NOx emissions in the region comes from coal plants. Over 80% of permits were allocated
to coal plants in 2004.
4NOx reacts with carbon monoxide and volatile organic compounds (such as hydrocarbons and
methane) in the presence of sunlight to form ozone in the lower atmosphere.
5Coal plants in 9 Northeastern states had to achieve compliance by May 2003; plants in the
southeastern states had to comply by May 2004.
6For want of a better term, I use the word "regulated" to refer to those electricity markets that
have not been restructured. This is misleading in the sense that wholesale electricity markets are
arguably subject to more regulation once restructuring takes hold.
7In many of the states that have chosen not to restructure their electricity industries, "incentive"
or "performance based" regulation (PBR) has replaced more traditional "rate of return" regulation.
PBR is a broadly defined concept that includes any regulatory mechanism that attempts to link
profits to desired performance objectives (such as improved operating efficiency, improved environ-
mental performance and rational procurement decisions). Under most forms of PBR, Regulators
continue to set baseline revenue requirements as a function of prudently incurred costs. See Knittel
for an assessment of how incentive based regulation has affected generator efficiency.
8See Lile and Burtraw for a compilation of PUC cost recovery rules and actions that were in place
during the years when utilities were making ARP compliance investment decisions (1990-1995).
9Of the 19 states that are affected by the NOx SIP Call, 12 have restructured their electricity
industries: CT, DE, IL, MA, MD, MI, NJ, NY, OH, PA, RI and VA. The remaining 7 chose not to
go forwards with restructuring: AL, IN, KY, NC, SC, TN, WV.
10A discussion of how these cost estimates are generated is included in the following section.
11These calculations assume perfect compliance and a permit cost of B2.25∕lb NOx. This was the
average futures permit price (per lb NOx) in the years leading up to the SIP Call. Permits started
trading in early 2001 in anticipation of the SIP Call Rule.
12For example, for this particular plant, a manager will not want to adopt "L3"; while this choice
would incur roughly the same capital costs as "CL1", expected variable compliance costs would be
significantly higher.
13I assume that anticipated electricity production is independent of the compliance strategy choice.
Production cost modeling has indicated that the effects of NOx regulation on electricity generation
dispatch are small (Farrell et al.). Anecdotal evidence suggestt that plant managers have used past
ozone season production to proxy for expected production, regardless of the compliance strategy
being evaluated (EPRI). This assumption is discussed in more detail in the Appendix.
14Trackers are mechanisms that allow the utility to recover its "tracked" expenses by adjusting its
rates accordingly. These trackers reduce the frequency of general rate cases and significantly reduce
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