“Customer Switching, Firm Entry and Regulatory Policy: Evidence from Retail Electricity Market Restructuring”
Jeffrey Macher (Georgetown University), John Mayo* (Georgetown University), and Robert Press (Georgetown University)
More than twenty years have passed since some states acted to restructure their retail electricity markets, opening these former monopoly markets to competition. A number of studies have examined the impacts of these restructurings, but two characteristics on the evolution of these markets remain underexplored. First, existing studies have focused almost exclusively on either the cost or price impacts of restructuring. At a more basic level, however, the economic impact of restructuring is largely driven by the willingness of new suppliers to enter formerly monopoly markets and the propensity of consumers to switch away from their historical monopoly provider. Indeed, the centrality of this observation is highlighted by considering a counterfactual situation in which consumers are unwilling to switch providers even when permitted to by the introduction of restructuring. In this instance, new supplier entry, and any downward pressure on the incumbent firm’s prices, is absent. In this paper, we consider in detail these more basic drivers – customer switching and firm entry – in the wake of electricity market restructuring. Second, the extant literature treats restructuring as a discrete phenomenon: that is, it either happened or did not happen. But state-level restructurings were nuanced, with notable temporal and structural variation in either their design or their implementation. State-level restructuring efforts can thus either facilitate or impede not only the incentives of suppliers to enter, but also the incentives of consumers to switch. In this paper, we delve into variations in the implementation of restructuring and the regulatory rules that apply to newly restructured markets; economic policies that can profoundly impact post-restructuring electricity market outcomes.