THE ADOPTION OF STATE ELECTRICITY REGULATION: THE ROLE OF INTEREST GROUPS*

Abstract

This paper examines the adoption of state electricity regulation around the beginning of the 20th century. I model this decision as a hazard rate to determine what influenced the adoption of state regulation. I find that adoption is positively correlated with capacity shortages, greater wealth and lower residential electricity penetration rates. These results suggest that state regulation responded to regulatory inefficiencies and residential consumer interests. In addition, adoption rates were higher in states that had a strong industrial and coal mining presence. These results are consistent with the interest group and contracting theories of regulation. STATES BEGAN REPLACING MUNICIPAL REGULATION of electric utilities with state regulation in 1907. Despite the long history, surprisingly little is known about the causes of the regime shift. In this paper, I estimate a hazard model that defines the probability of adopting state regulation as a function of variables that measure the potential benefits and costs of a number of interest groups, the shortage of installed capacity and concurrent levels of electricity prices and profits. The results shed light on which theories of regulation are most consistent with the data. I find evidence that is consistent with the interest group theory of regulation, which began with Peltzman [1976], and the contracting theory of regulation, attributed to Priest [1993]. The interest group theory of regulation centers around private interest group competition; regulators respond to the pressures of interest groups. One testable implication of the interest group theory is that if state regulation benefited a certain class of consumers, such as residential consumers, at the expense of another class of consumers, the