Shock Value: Bill Smoothing and Energy Price Pass‐Through

Abstract

Energy prices are volatile, affect every consumer and industry in the economy, and are impacted by regulations including gas taxes and carbon pricing. Like the pass‐through literature in general, the growing energy pass‐through literature focuses on marginal prices. However, multi‐part pricing is common in energy retail pricing. I examine the retail natural gas market, showing that while marginal prices exhibit full or nearly full pass‐through, fixed fees exhibit negative pass‐through. This is consistent with the stated desire by utilities and regulators to prevent ‘bill shock.’ I discuss implications for pass‐through estimation and for proposed alternative pricing structures for regulated utilities.

Retail Electricity Market Restructuring and Retail Rates

“…This is referred to as the prior mentioned “regulatory compact.” But many utilities also have fuel surcharges that go directly onto a customer’s bill that are specifically designed to allow for changes in fuel costs to pass through. Hausman (2019) finds that regulators and utilities attempt to prevent ‘bill shock’ by smoothing the pass-through of fuel prices to customer bills, perhaps a perceived benefit of COS regulation. Average cost is the basis for price setting under COS regulation, whereas marginal cost is the basis for pricing in a competitive market. But many utilities commonly have fuel surcharges that go directly onto a customer’s bill that are specifically designed to allow for changes in fuel costs to pass through.…”

“…This is referred to as the prior mentioned “regulatory compact.” But many utilities also have fuel surcharges that go directly onto a customer’s bill that are specifically designed to allow for changes in fuel costs to pass through. Hausman (2019) finds that regulators and utilities attempt to prevent ‘bill shock’ by smoothing the pass-through of fuel prices to customer bills, perhaps a perceived benefit of COS regulation.…”