Electricity Market Restructuring and Retail Rates

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.