Electricity Market Restructuring and Retail Rates

59 Pages Posted: 28 Jul 2020 Last revised: 3 Mar 2021

See all articles by Kenneth Rose

Kenneth Rose

DePaul University; Michigan State University

Brittany Tarufelli

Louisiana State University, Baton Rouge

Gregory Upton

Louisiana State University, Baton Rouge

Date Written: March 3, 2021

Abstract

State-regulated investor-owned utilities serve over 70 percent of electricity to final end-use retail consumers in the U.S. Prior to the 1990s, all 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. From 1996-2000, some states passed electricity market “restructuring” that, over time, required utilities to separate the generation portion of their operations and allowed customers to purchase power from third party providers (commonly referred to as “retail choice”). This empirical research examines the effect of restructuring on electricity prices to final consumers. While these policies were generally advertised to reduce rates for final customers, in fact rates increased in restructured states relative to plausible counterfactual synthetic controls. We investigate plausible mechanisms for this finding; we find evidence that retail rates in restructured states are more responsive to natural gas price changes, the marginal fuel source during the period of analysis, and natural gas prices nationally increased in the post-restructuring era.

Keywords: electricity market restructuring; retail choice; retail competition

JEL Classification: D42, K23, L52, Q48

Suggested Citation

Rose, Kenneth and Tarufelli, Brittany and Upton, Gregory, Electricity Market Restructuring and Retail Rates (March 3, 2021). USAEE Working Paper No. 20-462, Available at SSRN: https://ssrn.com/abstract=3660974 or http://dx.doi.org/10.2139/ssrn.3660974

Kenneth Rose

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Brittany Tarufelli

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

Gregory Upton (Contact Author)

Louisiana State University, Baton Rouge ( email )

Baton Rouge, LA 70803
United States

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