Utility Regulation

[Slides]

Lecture 1

Read the first 6 pages (429 - 435) in VHV Chapter 12.
Listen to the Heatmap podcast episode “Utility Regulation Sucks” (approx 1 hour)
- Pay attention to:
  - What’s driving increases in electricity prices?
  - How are utility prices set? How does this differ from a normal market?
  - What challenges does this pose?

Do this practice problem exploring the welfare of different outcomes possible under a natural monopoly.
- Solutions are here

Slides – look at old empirical_methods.qmd slides

Review of average vs marginal cost pricing. And the theory of which one might be better for consumers.
Look at the empirical evidence on whether deregulation has reduced costs.
A key challenge is that deregulation was not randomly assigned, as in an experiment, and deregulated states might have higher / lower prices for other reasons.
We reviewed omitted variable bias. All regressions omit variables. Problems arise when:
1. We omit variables that effect the outcome of interest, AND
2. The omitted variables are correlated with the variable of interest.
A workhorse method in empirical economics is to use group “fixed-effects” (dummies) to remove differences across groups and or time fixed effects to remove differences across time periods.
Combining these two (dubbed “two way fixed effects”) can estimate causal relationships when we observe one group before and after the treatment and another group during the same time periods that was never treated. This is called “difference-in-differences” .

Read “Why Are Energy Prices So High? Some Experts Blame Deregulation” NY Times (already did this in the problem set)
Read the 2021 Nobel Prize Award Summary
Then read sections 1-3 of Borenstein and Bushnell (2015). “The US Electricity Industry After 20 Years of Restructuring.” Annual Review of Economics 7 (1): 437–63. link.