Harvard Business School: Do Markets Reduce Prices? Evidence from the U.S. Electricity Sector

“Compared to utilities in states that stayed regulated, deregulated utilities faced significantly higher costs of energy. This resulted from both higher wholesale prices as well as purchasing a higher share of energy, instead of generating it. We find that restructuring lead to sharp increases in wholesale prices despite reductions in marginal fuel costs, such that generation facilities were able to charge prices at substantial margins above costs. We show that this can explain a large portion of the increase in retail rates after the restructuring of the electricity sector. “

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