The effect of default rates on retail competition and pricing decisions of competitive retailers: The case of Alberta

We investigate the impacts of default regulated products and their design on the development of competitive retail markets and retailers' pricing decisions. We analyze this question in the context of Alberta's competitive retail electricity market, using data on the prices and characteristics of both regulated and unregulated retail products from July 2006 to March 2017. Our analysis consists of a descriptive discussion of the evolution of market structure in the industry, followed by an econometric analysis of the effect of default prices on unregulated retail prices. We find that as the default product moved from being a long-term stable product, to one based on short-term forward market prices, the number of products and competitors increased substantially. Our econometric analysis of the pricing of unregulated contracts suggests that competitive retailers adjust prices upward in response to short-term increases in the regulated rate, even after controlling for changes in the costs of providing retail products.