generators’ choice of compliance strategy. Because the ARP began before electricity
restructuring got underway, all firms made their compliance choices in a regulated
electricity industry environment; variation in economic regulation across electricity
markets was limited to differences in PUC cost recovery rules and coal protection
measures.8
The piecemeal, state-by-state approach to electricity industry restructuring in
the US has since resulted in considerable inter-state variation in electricity market
structure which I can exploit in the interest of identifying an effect of electricity
market regulation on firms’ choice of compliance strategy. Uncertainty with regards
to the status of restructuring in the states affected by the SIP Call had been largely
resolved by March of 2000 when the courts upheld the NOx SIP Call and the terms of
compliance were finally established. Between 1994 and 1998, all 19 states that were
ultimately included in the NOx SIP Call held hearings to consider restructuring their
respective electricity industries. By 1999, restructuring bills had been passed in 12 of
these states and D.C. By 2000, the remaining 7 states had all resolved not to move
forward with electricity restructuring (EIA).9
The second factor that distinguishes this work from earlier papers looking at
compliance decisions under the ARP has to do with the regional nature of the ozone
non-attainment problem. Whereas the documented inefficiencies resulting from the
regulation of compliance cost recovery under the ARP were limited to regulated firms’
overinvestment in pollution control (i.e. the aggregate emissions reduction target
is not achieved at least cost), in the case of the SIP Call NOx market, additional
allocative inefficiencies arise if the firms who are biased towards investing in capital
intensive pollution controls are located in areas where the marginal health benefits
from pollution reduction are relatively low.
Health and environmental consequences could be significant if asymmetries in
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