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Optional Two-Part Tariffs: Toward More Effective Price Discounting
By unbundling usage from access, utilities can maximize contribution to margin and yet still retain load.
With deregulation and industry restructuring, energy utilities face price competition from marketers, brokers, independent producers and even other utilities. To succeed in this environment, utilities will need to develop innovative pricing strategies that better meet customer needs and respond more effectively to competition. The common response by utilities to competition calls for price discounting to retain "at risk"
customers by meeting the competition head-on.
To do that, electric utilities typically will employ one of two methods to discount prices. The first method adjusts the demand charge to make the average cost of utility service equal to the cost of the bypass threat or the least-cost competitive alternative. The second method adjusts the usage charge to attain the same end result.
Nevertheless, utilities can improve on these traditional discounting methods. The solution lies in pricing usage separate from access. Set the usage price at marginal cost and recover fixed costs through the access charge. By unbundling usage and access through a two-part tariff, a utility can maximize its contribution to margin and minimize the size of the discount needed to retain load.
This seemingly contradictory result comes directly from economic theory. First, by cutting usage rates, the seller can stimulate demand and deliver benefits to customers by what is known as "consumer surplus," compared to traditional approaches used by utilities to retain customers. Second, by recovering margin through an access charge, the utility avoids depressing demand
and actually boosts "producer surplus."
In fact, the utility can go one better. It can offer optional two-part tariffs. A key benefit of such pricing is that optional tariffs do not fall prey to the same restrictions
as the utility's base tariff.
Consequently, the utility enjoys much more flexibility in the design of the optional tariffs and can change them much more quickly in response to changing market conditions.
With optional tariffs, the utility offers one or more two-part tariffs to a particular customer class or market segment. %n1%n In fact, the same method used to design optional tariffs also can be employed to design and price services differentiated by quality. Such services should enable utilities to better meet customer needs and to increase profits. %n2%n
In telecommunications, AT&T offers its optional Reach Out America program. MCI counters with Friends and Family Program. These calling plans serve as examples of how energy utilities can use optional tariffs to tailor services and prices to the needs of customers.
Unbundled and Rebundled Services
Optional tariffs are well suited to rebundled services. Rebundled services mean combining unbundled or a la carte services to provide services that better meet the needs of a particular market segment.
Designing optional tariffs for unbundled services is relatively straightforward for basic functions such as generation, transmission and distribution, but can become quite complex for revenue-cycle services such as billing, meter reading and customer services. To design optional tariffs for an unbundled service such as transportation, a utility would use the same methods employed for bundled services; however, the usage