Retail Electricity Market Restructuring and Retail Rates

Abstract

Prior to the 1990s, all U.S. 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, and retail customers were unable to choose their electricity supplier. From 1996-2000, multiple states passed retail electricity market "restructuring." This empirical research examines the effect of retail restructuring on electricity prices to final consumers. We find that rates increased in restructured states relative to plausible counterfactuals in the years post-restructuring. But by twelve years after retail restructuring, we no longer observe any difference. We investigate plausible mechanisms, finding evidence that retail prices became more responsive to natural gas prices due to retail restructuring, the timing of which coincided with increases in natural gas prices nationally. We also test for whether restructuring had distributional effects across customer classes and find that in the short run residential customers benefited relative to industrial customers during transition periods, but that this difference does not persist into full implementation.

Has retail competition reduced residential electricity prices in Texas?

“…This topic, or aspects related to it, have previously been examined by Zarnikau and Whitworth (2006), McKearin (2015), and Hartley et al, (2019), and Brown et al, (2020a), in addition to the WSJ article. Second, it shows how the SC method may be used to estimate the impacts of restructuring on electricity prices, complementing recent papers by Rose et al, (2021) and Hill (2023). Third, it remedies the bias inherent in using state-level or utility-level data from the US Energy Information Agency (EIA) to estimate the impacts of retail competition when only portions of a state have been opened to retail competition or the market shares of retailers within an area opened to competition are not known.…”

“…Under traditional cost-of-service regulation, fuel factors and/or the generation component of retail electric rates re ected the weighted average cost of all fuels used by the integrated utility to generate electricity, as well as purchased power costs. Average cost pricing prevailed (Rose et al, 2021), implying that the revenues received from the utility's ratepayers were close to the reasonable and necessary costs incurred by the utility. Moreover, there was typically some regulatory lag which slowed the rate changes necessary to match fuel cost changes.…”

“…The ERCOT market is highly reliant upon natural gas as a generation fuel, and natural gas plants are typically on-the-margin (Zarnikau et al, 2019). As a result of unbundling and growing dependence upon wholesale markets, retail prices in areas of Texas opened to retail competition have become extremely sensitive to wholesale natural gas prices (Woo and Zarnikau, 2009;Brown et al, 2020a;Rose et al, 2021;Hartley et al, 2019;Hill, 2023).…”

“…Finally, we separately treat the transition period that frequently precedes full retail competition, following Rose et al, (2021) and Hill (2023).…”

Strategic Behavior and Market Design in Regional Climate Policy

“…I will examine the forward contract market under a few different scenarios to reflect real-world bilateral market possibilities. The extent of retail competition varies by state, where 13 states plus Washington, D.C. have fully restructured their electricity markets allowing for retail competition (Rose et al, 2020), in other states, varied degrees of retailer competition exist.…”