Electricity restructuring and the relationship between fuel costs and electricity prices for industrial and residential customers

A major concern with electricity market restructuring has been the possibility that fuel price volatility may leak into electricity prices. This view is credible if electricity price - fuel costs relation is stronger in restructured than in non-restructured states. We examine the validity of this view using panel data on for industrial, residential and commercial sectors in US states. The analysis accounts for cross-sectional dependency, cross-state heterogeneity, and interdependency of state fuel markets. The common correlated effects mean-group estimates suggest that (1) coal and natural gas costs Granger-cause electricity prices for industrial and commercial customers in both nonrestructured and restructured states; (2) both fuel costs also Granger-cause electricity prices for residential customers in non-restructured states but only natural gas costs cause electricity prices in restructured states; (3) the long-run impacts of fuel costs on electricity prices are higher in non-restructured than restructured states; and (4) electricity prices exhibit lower persistence in non-restructured than in restructured states. These results are do not support the view of higher integration between input costs and electricity prices in restructured markets. Policymakers should be aware of the differences in electricity price response in alternative market structures when implementing new federal policies.