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Optional Two-Part Tariffs: Toward More Effective Price Discounting

Fortnightly Magazine - July 1 1997

6.4 0.8

Table 5. Optional Tailored Tariffs for

"At Risk" Customers

Peak Usage Off-Peak Access

Charge Usage Charge Charge

Customer (cents/kWh) (cents/kWh) ($000/month)

1 3.0 2.0 635

2 3.0 2.0 663

3 3.0 2.0 463

4 3.0 2.0 444

5 3.0 2.0 330

6 3.0 2.0 323

7 3.0 2.0 323

8 3.0 2.0 308

9 3.0 2.0 277

10 3.0 2.0 215

Table 6. Comparison of Discounts Under Alternative Pricing Methods Compared to the Optional Tailored Tariff ($million)


Tailored Tariffs Method 1 Method 2

Discount 4.6 8.7 9.4


Difference NA 89 104

* Comparison is with respect to optional tailored tariffs.

Table 7. Automatic Tariff for Core Customers

(Conservative Elasticity Estimates)

Usage Charge Access Fee

(cents/kWh) ($000/month)

Off- Standard

Peak Peak Minimum Maximum Average Deviation

4. 6 3.9 32.9 107.8 50.9 16.9

1 Optional tariffs appear to possess most of the attributes George Pleat discussed in "Pricing and Profit Strategies for a Stand-Alone Electric Distribution Company," PUBLIC UTILITIES FORTNIGHTLY, Jan. 15, 1997, p. 20. For example, as Mr. Pleat recommends, optional tariffs: (1) use two-part tariffs consisting of an access charge (flat charge as Mr. Pleat terms it) and usage fees; (2) allow the usage charges to vary by season; and (3) are based on marginal costs, price elasticities and the costs of competitive alternatives.

2 According to Michael Porter, a noted expert on business strategy, success or failure for a company depends upon either delivering product at the lowest cost, or developing unique benefits that enable the company to differentiate itself from its rivals and sell its products for a premium price. (See Porter, M., Competitive Advantage: Creating and Sustaining Superior Performance, The Free Press, New York, 1985).

3 The cost of the competing alternative is computed as the levelized cost of optimally sized generation unit for each market segment.

4"Anti-Competitive Impacts of Secret Strategic Pricing in the Electricity Industry," by William Shepherd, PUBLIC UTILITIES FORTNIGHTLY, Feb. 15, 1997, p. 24.

5 See for example, California Public Utilities Commission Decision 92-11-052, November 23, 1992.

6The usage charges can be allowed to vary by season or by time-of-use.

7For ease of exposition, the optional automatic tariff is described as if there is only one usage charge. The method is also applicable to time-of-use tariffs that have multiple usage charges.


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