Testing the effectiveness of deregulation in the electric utility industry: A market-based approach

In this paper, I investigate one stated purpose of deregulation in the electric utility industry—to make utility operations more responsive to news releases, a proxy for market forces. My premise is that utilities providing electricity to highly deregulated states will be more responsive to market forces than those providing electricity to non-deregulated states. I employ intraday data from April to June 2001, the year after deregulation, and from 1994, the year before deregulation. I also employ the Brown-Forsythe-Modified Levene (BFL) test to determine the volatility differences between days with released news and days without released news. The results of BFL F tests for the year 2001 indicate that utilities headquartered in and serving states that have undergone substantial deregulation respond to news releases more strongly than those utilities headquartered in and serving states that are still regulated. The BFL F tests for utilities in 1994 confirm the premise that regulated utilities are less responsive to news releases. Finally, I conduct regression tests for utilities, the results of which support the findings from BFL tests—that all utilities serving highly deregulated states show pronounced responses to macroeconomic news releases. It appears that deregulation in the electric utility industry does, in fact, make utility operations more responsive to market forces and that deregulation is effective for states that implement a customer-choice model.