An assessment of interfuel substitution by electric utilities

Abstract

This paper applies a translog model to a pooled sample in order to measure the extent of regional interfuel substitution effects in the electric power industry. The results obtained indicate that relative changes in fuel prices both regionally and nationally have significant effects on fossil fuel consumption. This, in turn, has important implications for public policy. In particular, the market system appears better able to deal with exogenous shifts in energy supplies than has frequently been assumed in the formulation of public policies toward the energy crisis. Further, compared to aggregate United States time series estimates, a more elastic fuel price response is found thus questioning whether full long-run adjustment is being measured in the pure time series estimates. Given the importance of the latter in energy tax policy analysis for example, the question is indeed more than academic.