The effect of retail price regulation on the wholesale price of electricity

In this article, we study-both theoretically and empirically-the effects of changes in the regulated retail price of electricity on the unregulated wholesale price. We develop a relatively general supply and demand model that includes both regulated and unregulated market demands. We find that a reduction (or an increase) of the regulated price leads to an increase (a reduction) in the wholesale price. Moreover, we use a regression discontinuity approach to estimate the effect of the residential summer tariff-which generates a large reduction in the regulated retail price-over the wholesale price of electricity in Monterrey, Mexico. We find that the elasticity of the wholesale electricity price with respect to the regulated retail price was around-1 before the pandemic. Nevertheless, the most recent estimate is around-0.26. Because these figures are not negligible, authorities should consider the interdependence of retail and wholesale markets when changing the regulated retail price.