Electricity Prices and Costs Under Regulation and Restructuring

40 Pages Posted: 21 May 2008  

Seth Blumsack

Pennsylvania State University

Lester Lave

Carnegie Mellon University - David A. Tepper School of Business (Deceased)

Jerome Apt

Carnegie Mellon University

Date Written: August 2008

Abstract

Restructuring of the electricity industry was expected to improve the operating efficiency of electric power generators, leading to lower production costs and retail prices. Most studies conclude that there have been some efficiency gains, but the subject of whether retail prices have fallen has been contentious. The existing literature has a number of shortcomings, including the use of blunt or inappropriate definitions of restructuring, failure to incorporate the effects of regulatory decisions regarding price caps and stranded cost recovery, and the use of highly aggregated data. Our study addresses many of these problems and thus represents a significant improvement on existing work. We use a detailed firm-level data set to estimate how the markets and institutions established as a part of "restructuring" have affected the difference between prices and costs. Based on a number of different definitions, we find that utilities that have undergone restructuring display significantly higher price-cost markups than utilities that remained traditionally regulated. We find that some elements of restructuring are associated with higher price-cost margins, while others appear to be uncorrelated with prices and costs. The combination of introducing retail competition into an electric utility's operating territory and divestiture of that utility's generating assets has increased costs, but has increased prices even more. In particular, we find an average difference of 2 to 3 cents per kWh between prices and costs that is explained by restructuring rather than by increases in fuel prices. We conclude that restructuring has been beneficial to companies that restructured, but the evidence is far less clear concerning benefits to consumers.

Suggested Citation

Blumsack, Seth and Lave, Lester and Apt, Jerome, Electricity Prices and Costs Under Regulation and Restructuring (August 2008). 2008 Industry Studies Conference Paper. Available at SSRN: https://ssrn.com/abstract=1134953 or http://dx.doi.org/10.2139/ssrn.1134953

Seth Blumsack (Contact Author)

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

Lester B. Lave

Carnegie Mellon University - David A. Tepper School of Business (Deceased)

N/A

Jerome Apt

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

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