leila safavi

working papers

Can Firms Evade Pricing Regulation? The Case of Vertically Integrated Utilities

Pricing regulation in the United States commonly allows firms in regulated markets to pass on increases in input costs onto captive consumers. However, when regulated firms are vertically integrated with input suppliers, this form of regulation creates incentives for firms to extract profits by overpaying their affiliated supplier and then recovering costs from consumers, a phenomenon known as "regulatory evasion." This paper tests for evidence of evasion by studying input procurement decisions of firms in a major price-regulated market in the US, specifically electric and natural gas utilities deciding to procure natural gas pipeline capacity. Using a hand-built dataset on bilateral contracts of pipeline companies, I apply a triple-differences approach to test whether utilities procure more capacity at higher prices when contracting with an affiliated pipeline company, relative to other buyers who do not face pricing regulation. Results show that evasion by utilities is significant: utilities procure too much capacity from affiliates causing pipeline companies to overbuild new capacity by 28-33 percentage points on average. In contrast, I do not find that utilities pay differentially higher markups to affiliated pipeline companies relative to non-regulated buyers. I develop a model of regulatory oversight that shows how asymmetric information can rationalize the limited impact of evasion incentives on prices. Extrapolating estimates of overbuilding to all interstate natural gas pipeline projects built between 2010 and 2021, my estimates suggest that regulatory evasion by utilities has shifted $2.4 billion in excessive input costs onto consumers.

2. Interregional Electricity Transmission in the United States: Realized Savings and Opportunities for Increased Value, 2014– 2023 (with Julie Mulvaney-Kemp, Will Gorman, Dev Millstein and Ryan Wiser)

Interregional electricity trade in the United States reduces total energy costs, but falls short of maximizing the economic potential of existing transmission infrastructure. This analysis of 32 U.S. electricity system interfaces crossing grid or market seams finds an average achieved cost savings of at least $1226 million per year. This positive impact is offset by an average annual cost of uneconomic interchange of $551 million. Additional value of at least $238 million per year is left on the table due to under-utilization. Notably, uneconomic flows and low utilization rates can persist even when the price spread between regions is large. These conclusions are derived from historical (2014-2023) data on the magnitude and direction of interregional price spreads, the magnitude and direction of net energy transfers, and how these variables coincide. These findings motivate the development and deployment of solutions that improve interregional transmission operations, in parallel with robust transmission infrastructure planning.

3. Circuit Splits: Liability Reform and Likelihood of Environmental Risk in the Hazardous Waste Industry

Do firms factor in expected liability costs when entering contracts? This paper evaluates how joint liability laws influence market structure through contracting decisions between upstream and downstream partners. Using data on contracts from 2001-2017 between hazardous waste generators and disposal firms, I investigate whether weak joint liability rules increase the market share of disposal firms with higher rates of spills and accidents. I leverage a natural experiment created by the resolution of circuit split on the extent of joint liability prescribed by the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and compare market shares for accident prone disposal firms in circuits where joint liability was weakened to those in circuits where expected liability costs of contracting were not affected. I find that the difference in market share between dirty and clean firms grew 28.7% on average in treated markets after the resolution of the circuit split with the greatest gains going to the dirtiest firms. These results suggest that firms actively make contracting decisions based on expected future liability costs and that removing joint liability rules may have significant effects on the likelihood of environmental damages.

work in progress

Bargaining Power and Monopoly: Evidence from Natural Gas Pipelines

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