What can deregulators deregulate? The case of electricity

Abstract

We revisit Stigler and Friedland’s (J Law Econ 5:1–16, 1962) seminal paper by examining how competitive generation affects prices, sustainability, and reliability in the electricity industry. Exploiting state and year variation in the introduction of regional transmission organizations (RTOs) that facilitate open access to transmission, we first show that wholesale market deregulation significantly increases the prevalence of independent power producers (IPPs). Using RTO membership as an instrument, we find that IPP entry fails to cut electricity prices paid by consumers. This non-result is also robust to using initial electricity tariffs as an instrument for changes in IPP in a long-difference specification. We provide suggestive evidence that the absence of consumer gain can be attributed to efficiency loss due to mandated divestiture of generation assets or simply higher upstream transaction costs. But, increased prevalence of IPPs is associated with more solar and hydropower, although the use of non-fossil fuel as a whole remains unchanged because less nuclear power is used. More IPPs, however, is also associated with less reliable electricity supply. A review of the origins of electricity deregulation suggests that this tradeoff between environmental sustainability and energy security is not likely to have been the major determinant of the deregulation. Rather than a pro-consumer deregulation, the regulatory change is perhaps more appropriately interpreted as a regulatory capture that benefits IPP entrants and existing energy marketers.