Retail Electricity Market Restructuring and Retail Rates
67 Pages Posted: 28 Jul 2020 Last revised: 22 Aug 2022
Date Written: August 19, 2022
Prior to the 1990s, all U.S. states used a “cost of service (COS)” regulation regime in which investor-owned utilities were allowed to recover prudently incurred costs plus a rate of return on capital expenditures, and retail customers were unable to choose their electricity supplier. From 1996-2000, multiple states passed retail electricity market “restructuring.” This empirical research examines the effect of retail restructuring on electricity prices to final consumers. We find that rates increased in restructured states relative to plausible counterfactuals in the years post-restructuring. But by twelve years after restructuring, we no longer observe any difference. We investigate plausible mechanisms, finding evidence that retail prices became more responsive to natural gas prices due to restructuring, the timing of which coincided with increases in natural gas prices nationally. We also test for whether restructuring had distributional effects across customer classes and find that in the short-run residential customers benefited relative to industrial customers during transition periods, but that this difference does not persist into full implementation.
Keywords: electricity market restructuring; retail choice; retail competition
JEL Classification: D42, K23, L52, Q48
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