The governance of transactions: Joskow's coal-burning generating plants example revisited

Abstract

In a classical paper, Joskow (1985, Journal of Law, Economics and Organization 1(1), Fall, 33–80) discussed governance mechanisms for transactions between coal suppliers and electric power companies: vertical integration, long-term and short-term contracts. According to the foundations of Transaction Cost Economics, vertical integration and long-term contracts would be the most probable outcome when a coal-burning generating plant requires durable transaction-specific investments — a mine-mouth plant is an extreme situation. This hypothesis is evaluated in the Spanish context, through a case study of 14 power plants located in coalfields and which have historically had poor transportation infrastructure. The analysis shows that the role played by long-term contracts in Joskow's US example, was taken in Spain by State interventionist arrangements established to promote thermoelectric development in the coalfields. Such arrangements induced electric utilities to carry out specific investments whose only guarantee was a tacit commitment to recovery through regulation. These plants would have become stranded in a pure competitive scenario. So the government — accepting the implicit contract argument — recognised the value of these stranded investments within a highly controversial package of transition costs, in the process of liberalising the electricity industry.