Does electricity competition work for residential consumers? Evidence from demand models for default and competitive residential electricity services

Residential electricity competition is under investigation in a number of U.S. states due to alleged market imperfections including consumer behavior that is supposedly inconsistent with rational, economic decision-making. In this paper, I examine these issues and use a panel data of distribution utilities in Illinois during the period 2011–2017 to estimate demand models for regulated and competitive electricity services. I find that residential electricity consumers in Illinois are acting in a manner consistent with standard consumer behavior theory, with price elasticity of demand estimates that are generally in line with those in the literature, ranging between − 0.40 and − 0.60. Importantly, I find evidence that customers served by competitive suppliers are sensitive to the regulated default service price. Specifically, I find that a 1% decrease in the regulated default service price will lead to approximately 0.5% of customers served by competitive suppliers switching to the regulated default service. These findings call into question some of the underpinnings of policymakers’ critique of residential electricity competition.