Does regulation reduce electricity rates? A research note

This paper reasseses the original data of Stigler and Friedland's influential 1962 article on the effects of regulation, which studied U.S. electricity rates in the early 1900's. Whereas Stigler and Friedland contended the economic effects of regulation serve those regulated regardless of the statutory characteristics of the regulations, a critical look at their data suggests the regulations studied did have their intended effect. 1. The capture thesis The "capture" theory supersedes the usual debate over the role of regulation as a tool of public poliCy. Rather than argue that regulation "distorts" the market but may be necessary to produce certain public goods, it argues that regulation does not work. Special interests (for example, large industrial users of electricity or even the utilities themselves), capture the regulators and use the regulation to advance their interests rather than the public well-being. An article that has had a significant role in launching the capture theory is the study of electricity rates by Stigler and Friedland (S&F). They pointed out that what is at issue is not what the regulation states, but its actual economic effect (1962, p. 1). They argued that regulation does not yield the intended and expected service to public interest; it does not curb monopolies. This line of reasoning has been since often repeated and extended (Stigler, 1971; Peltzman, 1976; Kalt and Zupan, 1984, p. 279; Navarro, 1984, p. 6; numerous articles in Journal of Law and Economics). S&F foster their position by analyzing the effect of regulating the electricity rates charged by public utilities. They show that data that seem to suggest that regulation curbs rates, in effect has no such effect. My re-examination of the same data suggests that they do not support the S&F position, that regulation in this important case had the effect desired by the public. That is, the purpose of this article is limited: It is not a review article of the literature on regulation or on electricity rates; it is only a report on the result of an effort to replicate an often-cited, influential finding. Replication, needless to say, is at the heart of science. It is rare in social science because the data of one researcher are often not accessible to others. This article would not have been possible without the generosity of S&F who provided me with a copy of their data. My findings were submitted to them.