An Econometric Assessment of Electricity Demand in the United States Using Utility-specific Panel Data and the Impact of Retail Competition on Prices

Abstract

This paper uses a panel data of 72 U.S. electricity distribution companies during the period 1972-2009 to estimate structural demand and reduced-form price models. I find the own-price and income elasticity of demand for residential, commercial, and industrial customers that are generally consistent with the published economics literature. While static models work well for residential demand, dynamic models are more appropriate for the larger customer classes who require more time to adjust. Conditioning on the regressors, I find that residential and commercial electricity demand has been increasing slowly while industrial electricity demand and deflated electricity prices have been decreasing. In all price models I find that total factor productivity is consistently the most significant explanatory factor with a 1% increase in total factor productivity resulting in a reduction in deflated electricity prices ranging between 0.05% and 0.30%, depending on the model. Lastly, I find that retail electricity competition is associated with lower deflated electricity prices with the mean total impact being -4.3%, -8.2% and -11.1% for residential, commercial and industrial customers, respectively and with the impact diminishing over the sample period for residential customers, remaining relatively constant for commercial customers and increasing for industrial customers.