Electricity Pricing to U.S. Manufacturing Plants, 1963-2000

Abstract

There is tremendous dispersion in the electricity prices paid by manufacturers, as we show, greater than the dispersion in production worker wages. We also document a dramatic compression in the log price distribution between 1967 and 1977, which we trace to a sharp erosion of quantity discounts. Spatial dispersion in average electricity prices among states, counties and utility service territories is also large. The spatial sorting of electricity-intensive manufacturing activity to areas with cheaper electricity is modest, but it increases after 1973, apparently in response to a shift from falling to rising real electricity prices. To estimate the role of cost factors and markups in quantity discounts, we exploit differences among utilities in the purchases distribution of their customers. The estimation results reveal that supply costs per watt-hour fall by more than half over the range of purchases in the data, regardless of time period. Prior to the mid 1970s, marginal price and marginal cost schedules with respect to purchase quantity are nearly identical, remarkably in line with efficient pricing. In later years, marginal supply costs exceed marginal prices for smaller manufacturing customers by 10-20%. The data provide no support for a Ramsey-pricing interpretation of quantity discounts. JEL codes: L60, L94, Q40