Customer Switching, Firm Entry and Regulatory Policy: Evidence from the Electric Utility Industry

Abstract

More than twenty years have passed since some states restructured their intra-state electricity markets, opening these former monopoly markets to competition. A number of studies have subsequently examined such restructurings, yet two key characteristics of the extant research create the opportunity to provide fresh insights into the evolution of these markets. First, research to date almost exclusively focuses on how restructuring affects electricity costs and prices. At a more primitive level, however, any economic impact of restructuring is driven by the willingness of new suppliers to enter formerly monopoly markets and by the propensity of consumers to switch away from their historical monopoly provider. Second, existing research largely focuses on restructuring as a discrete phenomenon: it either happened or did not happen. The restructuring of intra-state electricity markets was considerably more nuanced, however, both in initial legislative design and in regulatory implementation than implied by the prevailing discrete categorization. We examine the role played by these more basic drivers of restructuring outcomes and delve into the potential for variations in state-level legislative design and ex post implementation to profoundly affect the evolution of restructured electricity markets. Our empirical analysis provides considerable support for not only the crucial interplay between consumer switching and entry, but also the key role that legislative and regulatory market design mechanisms have on the evolution of electricity market structure.

Keywords: Customer Switching, Firm Entry, Electricity Restructuring

JEL Classification: L1, L51, L94