| Energy costs are central to economic activity, since almost all activities require energy for their production, distribution, and consumption. Electricity prices, especially, are a crucial element in residential, commercial, and manufacturing sectors throughout the nation, largely because the range of these costs can be extremely volatile and high. Moreover, energy costs are highly political. The structure and regulation of the electricity market is of utmost importance to all of the country's activities.;The market for electricity has changed significantly in the past two decades. Electricity production and distribution is a natural monopoly. As with most other historic natural monopolies, such as telephones, the electricity market in the United States was a vertically integrated market, regulated by government, for many decades.;Traditionally, the Federal Energy Regulatory Commission (FERC) set rates under which a company could sell into the wholesale electricity market. For decades these rates were determined using cost of service (COS) formulas. Beginning in the mid-1980s and significantly expanded in the mid-1990s, FERC began considering proposals for market-based rather than cost-based pricing of wholesale power sales.;This research examines the question of potential significant differences in the price of electricity from entities able to sell into a wholesale electricity market at cost-based rates from those selling at market-based rates. The results of this analysis suggest that there is a statistically significant difference in prices of wholesale electricity between transactions occurring at market-based rates and cost-based rates. |
