Policy Papers

Evaluating the Effects of Wholesale Electricity Restructuring

by and

Electric power is one of the last major regulated industries to undergo some form of ―liberalization.‖ One of the most important steps has been creating regional transmission organizations (RTOs) in major regions of the country. RTOs are independent non-profit entities that operate utility-owned transmission networks. They are intended to increase competition and efficiency in the market for wholesale power, which should lead to lower wholesale prices. This paper tests whether RTOs have, in fact, achieved this goal. Our results indicate that RTOs have not lowered wholesale prices. Controlling for fuel costs and shares, and state- and time-specific factors, we find that prices in areas with RTOs have been higher than otherwise would have been the case. Our results also show that this outcome is not a reflection of initial market design flaws that subsequently have been corrected. RTOs that have been in operation longer have not as yet provided benefits in the form of lower wholesale prices.