This article presents an empirical study of market power in the British electricity industry. Estimates of price-cost markups are derived using direct measures of marginal cost and several approaches that do not rely on cost data. Since two suppliers facing inelastic demand dominate the industry, most oligopoly models predict prices substantially above marginal costs. All estimates indicate that prices, while higher than marginal costs, are not nearly as high as most theoretical models predict. Regulatory constraints, the threat of entry, and financial contracts between the suppliers and their customers are considered as possible explanations for the observed price levels.

While neoclassical models assume static cost-minimization by firms, agency models suggest that firms may not minimize costs in less-competitive or regulated environments. We test this using a transition from cost-of-service regulation to market-oriented environments for many U.S. electric generating plants. Our estimates of input demand suggest that publicly-owned plants, whose owners were largely insulated from these reforms, experienced the smallest efficiency gains, while investor-owned plants in states that restructured their wholesale electricity markets improved the most. The results suggest modest medium-term efficiency benefits from replacing regulated monopoly with a market-based industry structure. Keywords:Competition; Efficiency; Restructuring; Regulation; Deregulation; Electric Utilities. JEL Codes: JEL L51, L11, L94, L22. * Fabrizio: Assistant Professor of Organization & Management, Goizueta Business School, Emory University, 1300 Clifton Road NE, Atlanta, GA 30322, Kira_Fabrizio@bus.emory.edu; Rose: Professor of Economics, MIT Department of Economics, E52-280b, 50 Memorial Drive, Cambridge MA 02142-1347, nrose@mit.edu; Wolfram: Associate Professor of Business Administration, Haas School of Business, UC Berkeley, Berkeley, CA 94720-1900, wolfram@haas.berkeley.edu. Rose gratefully acknowledges support from the MIT Center for Energy and Environmental Policy Research (CEEPR), the Hoover Institution, the Guggenheim Foundation, and the National Bureau of Economic Research. We thank participants at NBER Productivity and Industrial Organization program meetings, the University of California Energy Institute POWER conference, and the MIT CEEPR conference, as well as seminar participants at Chicago, Harvard, MIT, UC Berkeley, UC Davis and Yale for their suggestions. Our work has benefited greatly from detailed comments by Mitali Das, Al Klevorick, Mark Roberts, Charles Rossman and Johannes Van Biesebroeck, and two anonymous referees. We thank Tom Wilkening for assistance in coding restructuring policies across states and Jen-Jen L`ao for assistance coding plant identities. 1Economists have long maintained that markets generate important efficiency benefits for an economy. These arguments usually focus on allocative efficiency; the implications of competition for technical efficiency are less clear. Neoclassical models of profit-maximization assume static cost-minimizing behavior by all firms, regardless of market competitiveness.1 Agency models, however, in recognizing the interplay of asymmetric information with the separation of management and control, suggest possible deviations from cost-minimization by effort-averse managers. These distortions may be amplified when a firm's prices are set by asymmetrically-informed regulators (e.g., JeanJacques Laffont and Jean Tirole, 1993). Replacing regulated price determination with markets makes firms residual claimants to cost-savings, potentially increasing incentives for efficiency-enhancing effort. 2 Theory suggests several possible roles for markets:c...

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for excellent research assistance. We are indebted to Jesse Worker for outstanding management of a challenging project. Finally, we thank our contacts at both our partner utility and the community action agencies, without whom this project would not have been possible. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w21331.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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Over the next 25 to 30 years, nearly all of the growth in energy demand, fossil fuel use, associated local pollution, and greenhouse gas emissions is forecast to come from the developing world. The U.S. Energy Information Administration (2010a, table 1) reports that energy consumption in OECD and non-OECD countries was roughly equal in 2007, but from 2007 to 2035, it forecasts that energy consumption in OECD countries will grow by 14 percent, while energy consumption in non-OECD countries will grow by 84 percent. This paper argues that the world's poor and near-poor will play a major role in driving medium-run growth in energy consumption. As the world economy expands and poor households' incomes rise, they are likely to get connected to the electricity grid, gain access to good roads, and purchase energy-using assets like appliances and vehicles for the first time. The energy needed to manufacture and use these new assets is likely to constitute a large portion of the growth in the demand for energy in the medium term. Also, refrigerators and cars are long-lived durable goods, so increases along the extensive margin driven by first-time purchases of these assets will have substantial consequences for energy consumption and greenhouse gas emissions for some time.

As both a regulator and an academic, Fred Kahn argued that end-use electricity consumers should face prices that reflect the time-varying marginal costs of generating electricity. This has been very slow to happen in the US, even in light of recent technological advances that have lowered costs and improved functionality for meters and automated demand response technologies. We describe these recent developments and discuss the remaining barriers to the proliferation of time-varying electricity pricing.