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Electricity Pricing to U.S. Manufacturing Plants, 1963-2000

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  • Steven J. Davis
  • Cheryl Grim
  • John Haltiwanger
  • Mary Streitwieser

Abstract

We develop a large customer-level database to study electricity pricing to U.S. manufacturing plants from 1963 to 2000. We document tremendous dispersion in price per kWh, trace that dispersion to quantity discounts and spatial differentials, estimate the role of cost factors in quantity discounts, and test whether marginal price schedules conform to marginal cost and Ramsey pricing conditions. Our cost analysis and pricing tests rely on a novel empirical approach that exploits utility-level differences in the customer size distribution to estimate how supply costs vary with purchase quantity. The results reveal that annual supply costs per kWh fall by more than half in moving from smaller to bigger purchasers, providing a clear cost-based rationale for quantity discounts. Before the mid 1970s, marginal price and marginal cost schedules are nearly identical, in line with efficient pricing. In later years, marginal supply costs exceed marginal prices for smaller manufacturing customers by 10% or more. In contrast to a clear role for cost factors, our evidence provides no support for a standard Ramsey-pricing interpretation of quantity discounts. Spatial dispersion in retail electricity prices among states, counties and utility service territories is large and rises over time for smaller purchasers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13778.

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Date of creation: Feb 2008
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Handle: RePEc:nbr:nberwo:13778

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  1. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth. Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372 National Bureau of Economic Research, Inc.
  2. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195115826, October.
  3. Peltzman, Sam, 1971. "Pricing in Public and Private Enterprises: Electric Utilities in the United States," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 14(1), pages 109-47, April.
  4. Johannes Van Biesebroeck, 2004. "Robustness of Productivity Estimates," NBER Working Papers 10303, National Bureau of Economic Research, Inc.
  5. Besanko, David & D'Souza, Julia & Thiagarajan, S Ramu, 2001. "The Effect of Wholesale Market Deregulation on Shareholder Wealth in the Electric Power Industry," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 44(1), pages 65-88, April.
  6. Brown,Stephen J. & Sibley,David Sumner, 1986. "The Theory of Public Utility Pricing," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521314008.
  7. Severin Borenstein, 2002. "The Trouble With Electricity Markets: Understanding California's Restructuring Disaster," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 16(1), pages 191-211, Winter.
  8. Severin Borenstein & Stephen Holland, 2005. "On the Efficiency of Competitive Electricity Markets with Time-Invariant Retail Prices," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 469-493, Autumn.
  9. Paul L. Joskow & Richard Schmalensee, 1988. "Markets for Power: An Analysis of Electrical Utility Deregulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262600188, December.
  10. Meyer, Robert A & Leland, Hayne E, 1980. "The Effectiveness of Price Regulation," The Review of Economics and Statistics, MIT Press, vol. 62(4), pages 555-66, November.
  11. Goldman, M Barry & Leland, Hayne E & Sibley, David S, 1984. "Optimal Nonuniform Prices," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(2), pages 305-19, April.
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Cited by:
  1. Matthew E. Kahn & Erin T. Mansur, 2010. "How Do Energy Prices, and Labor and Environmental Regulations Affect Local Manufacturing Employment Dynamics? A Regression Discontinuity Approach," NBER Working Papers 16538, National Bureau of Economic Research, Inc.
  2. Kahn, Matthew E. & Mansur, Erin T., 2013. "Do local energy prices and regulation affect the geographic concentration of employment?," Journal of Public Economics, Elsevier, Elsevier, vol. 101(C), pages 105-114.

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