MARKET STRUCTURE AND THE PRICING OF ELECTRICITY AND NATURAL GAS  Christopher R. Knittelw US Electricity and natural gas markets have traditionally been serviced by one of two market structures. In some markets, electricity and natural gas are sold by a regulated dual-product monopolist, while in other markets, electricity and natural gas are sold by separate regulated single-product monopolies. I analyze whether electricity and natural gas prices depend on the market structure and compare these results to the predictions of a number of theories. The results are most consistent with the political economy theories suggesting that regulators respond to interest group activity. I. INTRODUCTION US ELECTRICITY AND NATURAL GAS RETAIL MARKETS have developed into two distinct market structures. 1 In some jurisdictions, a dual-product monopo- list supplies both electricity and natural gas, while in others, two single- product monopolists separately offer electricity and natural gas. In this paper, I examine whether prices for electricity and natural gas differ across the two market structures. Prices in the two market structures may differ for a number of reasons. Most notably, electricity and natural gas are substitutes in consumption. 2 This implies that, absent regulation, a dual-product firm will have an incentive to price both electricity and natural gas higher than two comparable single-product firms. This incentive is tempered by potential cost differences in the two market structuresForiginating from the fact that natural gas is an input into the generation of electricity. The costs of the r Blackwell Publishing Ltd. 2003, 9600 Garsington Road, Oxford OX4 2DQ, UK, and 350 Main Street, Malden, MA 02148, USA. 167 THE JOURNAL OF INDUSTRIAL ECONOMICS 0022-1821 Volume LI June 2003 No. 2  This paper has benefitted from the comments of Severin Borenstein, James Bushnell, Victor Stango, two anonymous referees and the editor. Financial support from the Boston University School of Management Junior Faculty Research Grant program and the University of California Energy Institute is gratefully acknowledged. Julie Shultz provided excellent research assistance. All errors are the responsibility of the author. wAuthor’s affiliation: Department of Economics University of California at Davis and University of California Energy Institute Davis, CA 95616, USA E-mail: email: crknittel@ucdavis.edu 1 Natural gas firms refer to natural gas distribution firms, which remained regulated entities after the deregulation of the natural gas exploration/production industry. Beginning in 1998, electricity markets within the United States began to restructureFallowing competition in the generation sector of the industry. The data used in this study stop at 1995. Therefore for the purposes of this study, electricity firms are regulated monopolies. 2 Electricity and natural gas are substitutes for a number of uses. Most notably in heating, cooking and motor devices.