The impact of firm membership in an Independent System Operator (ISO) on production cost and cost efficiency in the generation sector of the U.S. electric utility industry

This paper examines how ISO membership impacts cost efficiency. Utilities joining ISOs can face more competition in selling electric power, possibly leading to lower profits, which can incentivize utilities to operate more cost efficiently to maintain a specified level of profits. The empirical model involves estimating a Probit model, then OLS regression, then a stochastic cost frontier. Using a 1992 to 2000 panel of 34 investor‐owned electric utilities, empirical results indicate that ISO membership contributed to higher production cost, lower cost efficiency, and ISO members subject to the 1990 Clean Air Act Amendments operated more cost efficiently than ISO members not subject to the Amendments.