Generating efficiency: Economic and environmental regulation of public and private electricity generators in Spain

Economic regulation of firms with market power has placed increasing emphasis on incentive-based regulation such as price caps. We focus on the effect of regulation as distinct from ownership, and identify the effect of two different regulatory schemes on both publicly and privately owned Spanish electricity generators. Publicly owned generators were more efficient under cost of service regulation; private (but not public) firms responded to incentive regulation by increasing efficiency, bringing their productivity to similar levels. We introduce some novelty in modelling efficiency, including three pollutants and declared plant availability as outputs, and we test for the effect of environmental regulation in reducing pollutants.