Harvard Business School Paper Finds Consumers Don’t Benefit from Restructured Markets

In the two (three?) cheers for regulated markets category, a recent Harvard Business School paper by Alexander MacKay Ignacia Mercadal finds that consumers don’t benefit from restructured electricity markets.  From the abstract: “In some circumstances, regulated prices may be preferred to market-based prices when markets are not perfectly competitive.”

The paper reaches this conclusion by noting that market power concerns in retail choice markets swamp what might other be the cost minimizing incentives in a competitive market.  What this means is producer welfare is enhanced because of the ability to exercise market power, but consumer welfare is not increased because the cost reductions do not make it down to the retail level.  So, it’s good to be a generator in a restructured market; a consumer, not so much.

The important paragraph from the paper:

We find substantial price increases for consumers in deregulated states relative to consumers in regulated states. On the other hand, marginal costs declined in deregulated states, indicating that higher prices are driven by higher markups. Overall, we estimate that gross markups— retail prices minus the marginal cost of generation—increased by 15 dollars per MWh from 2000 to 2016. Relative to 1999 price levels, this change in markups corresponds to a 19 percent increase in prices over the period. Crucially, our data allow us to examine the impacts in wholesale markets, providing greater insight into the underlying mechanisms that explain this increase. We find that wholesale markups increased by more than the decline in generation costs, leading to higher wholesale prices. Wholesale markups increased by roughly 9 dollars per MWh, representing over 60 percent of the overall increase in gross markups. Retail markups also increased modestly. Thus, we find market power in the generation market to be the primary driver of price increases.

So, if your looking to start a business, open a manufacturing facility or just reduce your power bill, then head to a regulated state where someone – a regulator, albeit imperfectly – has your back.