Abstract
This study investigates the stock price reaction of electric energy utility firms to the 2003 blackout in the Northeast of the USA and if the market was able to identify the responsible firm. Therefore, we employ event study methodology and select a sample of US-based electric energy utility firms. Although it took a commission almost eight months to name the firm responsible for the blackout, investors punished FirstEnergy only two trading days after the blackout - and were right, as it later turned out. This study demonstrates this based on the analysis of abnormal stock returns and abnormal trading volumes. Our findings suggest that investors have extensive knowledge of electric energy utility firms' responsibility as they were able to identify the culprit. This, in turn, demonstrates that electric power utility firms should ensure a high-quality grid infrastructure to avoid these negative outcomes.Keywords: Event study; Blackout; System overload; Market efficiencyJEL Classifications: G1, Q40 DOI: https://doi.org/10.32479/ijeep.11756
Highlights
On 14 August 2003 shortly after 4 pm, a large part of the northeast of the USA experienced a major blackout
The blackout was a consequence of a series of human and system failures, including overgrown trees next to the high-voltage power line and bugged alarm systems at FirstEnergy Corporation (FirstEnergy), which did not inform the control room of the line damage (Minkel, 2008)
Since the privatization and liberalization of the US electric energy system, there was limited interest in private utility firms to invest in new wires, new towers, and new transformers, which eventually fostered the occurrence of the system overload and the corresponding blackout (Antonsen et al, 2010; Firestone and Pérez-Peña, 2003; Xin, 2005)
Summary
On 14 August 2003 shortly after 4 pm, a large part of the northeast of the USA experienced a major blackout. The blackout itself, represented only the tip of the iceberg as the power system in the Northeast of the US has long been subject to inadequate transmission capacity and bottlenecks due to a limited number of high-voltage lines. Since the privatization and liberalization of the US electric energy system, there was limited interest in private utility firms to invest in new wires, new towers, and new transformers, which eventually fostered the occurrence of the system overload and the corresponding blackout (Antonsen et al, 2010; Firestone and Pérez-Peña, 2003; Xin, 2005). We want to test this claim and pose the following research question: RQ1: Did the blackout trigger abnormal returns for electric power utility firms on the stock market? We want to test this claim and pose the following research question: RQ1: Did the blackout trigger abnormal returns for electric power utility firms on the stock market? Second, we want to analyze whether the stock market was able to identify the responsible firm for the blackout (system overload) which we cover in our second research question: RQ2: Was the stock market able to identify the responsible firm (culprit)? To this end, we employ event study methodology and analyze the abnormal stock returns and trading volumes associated with the blackout incident (MacKinlay, 1997)
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