Power Politics: Electoral Cycles in German Electricity Prices

Abstract: We provide evidence that German public energy providers, over which municipality-level politicians hold substantial sway, systematically adjust the pricing of electric energy in response to local electoral cycles. In the run-up to elections, electricity prices set by these public utilities systematically decrease compared to the prices set by privatized utilities which are unconnected to local politicians. In the three years after an election, public utilities set relatively higher prices than private energy providers. This pattern is in line with both, an artificial reduction in prices before an election that needs to be countermanded by future price increases, and an artificial postponement of market-driven price increases until after the election is over. To establish these results, we make use of a unique and novel dataset that covers the universe of German electricity prices between 2003 and 2013. Identification of the electoral cycle in electricity prices is facilitated by the rich variation in municipal elections dates and the existence of a comparable group of non-public utilities. Our results suggest that government-controlled firms may represent a viable alternative to - often unavailable - standard public-finance instruments for local politicians to influence their popularity before elections.