Do Markets Reduce Prices? Evidence from the U.S. Electricity Sector

Abstract

We construct a novel dataset on electricity generation, wholesale transactions, and retail sales to assess the shift from cost-of-service regulation to deregulated, market-based prices in the context of the U.S. electricity sector. Consistent with earlier studies, we find that the costs of generation fell in deregulated markets. However, despite lower generation costs, wholesale prices increased along with utilities' overall expenses on energy. The resulting increase in utility costs can explain a substantial portion of the increase in downstream retail prices. Overall, we estimate that the increase in wholesale margins more than offset the efficiency gains, which can occur when markets are not perfectly competitive.

Keywords: Deregulation, Markets, Market Power, Electricity

JEL Classification: L51, L94, D43, L13