I show that retail natural gas pricing departs from efficient two-part tariffs in ways that lead to price stickiness. In particular, the fixed fees vary over time, with the apparent goal of lessening “bill shock.” For instance, high commodity prices lead to reduced fixed fees, such that the bill total is smoothed. Moreover, rising commodity prices lead to additionally reduced fixed fees; i.e. there is an asymmetry. The paper thus offers an alternative explanation for the sticky prices observed in the macro literature. In this setting, it is not that menu costs are high (commodity costs are automatically incorporated in bills) but rather that firms or price regulators deliberately smooth cost shocks. As a result, net revenue to the utility is negatively impacted by commodity prices, and I show that maintenance and capital expenditures are impacted. That is, expenditures on pipeline repairs and investments are lowered when commodity prices are high. This paper contributes to the industrial organization literature on mark-ups, the energy literature on regulated utilities, the macro literature on sticky prices, and policy discussions about aging pipelines.
Past Faculty Workshop•Nov 15, 2016
Catie Hausman, University of Michigan
Shock Value: Bill Smoothing and Sticky Prices in Utility Retail Rates