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Seven Myths of Real-Time Pricing

Fortnightly Magazine - March 1 1997

the RTP tariff includes a monthly service charge ranging from $155 to $270. Hence no subsidy is required.

Myth 6. Load control is superior to RTP.

Reality 6. A well-conceived RTP program is a load-control program based on marginal or incremental costs. It can be designed to be superior to a well-conceived, quantitative, load-control program.

An RTP program relies on price signals to shift load and thereby reduce capital requirements. Load control curtails demand directly by varying the amount supplied at the discretion of the utility with prior approval by the customer. RTP is preferable to load control because only those customers that value the power least are curtailed, and always at their own discretion. It avoids rationing. By contrast, load control often denies service to customers who value the power at more than the supplier's marginal cost.

Myth 7. One-part RTP promotes greater efficiency more than two-part RTP.

Reality 7. A two-part RTP program has greater potential for efficiency than a one-part plan.

Though more difficult to implement, two-part pricing is economically more efficient because energy prices are set much closer to the marginal cost. The two-part tariff also offers less price risk to the customer, since real-time prices apply only to peak usage. It promotes efficiency as long as the customers and the utility do not negotiate an understated or overstated customer baseline load. A one-part pricing program involves applying a direct adjustment to the marginal energy charges through an adder or multiplier. Though easier to implement, the one-part pricing tariff distorts the price away from marginal costs, and also increases the customer's price risk because real time prices apply to all usage. Hence, a two-part tariff results in greater efficiency than a one-part tariff. t

Albert L. Danielsen is professor of economics and director of the James C. Bonbright Center at the University of Georgia. He was one of the principal editors of Principles of Public Utility Rates, 2d Ed. (Pub. Utils. Reports, Inc.), the 1988 update of the classic text, Principles of Public Utility Rates, by James C. Bonbright (Columbia Univ. Press, 1961). Nainish K. Gupta is a graduate research assistant at the center and the university's economics department.

1Public Utility Research Center, Impacts of Mandatory Time of Use Rates on Conservation Programs, University of Florida, Gainesville, Fla., April 1995.

2See, Colman, Andrew and Douglas Castleberry, James Blomberg, and Rob Reynolds, "Competitive Edge: PowerView, a DSM-Focused Technology," PUBLIC UTILITIES FORTNIGHTLY, Nov. 1, 1993, p. 40.

3Flavin, Christopher and Nicholas Lenssen, "The Electricity Industry Sees the Light," Technology Review, May/June 1995.

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