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The Barriers to Real-Time Pricing: Separating Fact From Fiction

Real-time pricing has been hindered by the misperception that a shift to RTP will create new types of risks, without creating benefits for utilities or customers.
Fortnightly Magazine - July 15 2002

federal regulatory commissions should make research on the barriers identified in this article a priority. Otherwise, like King Tantalus in Greek mythology, tomorrow's customers will continue to be starved of these benefits, whether they bend low to drink the water from the stream or reach high to eat the fruit from the tree.

  1. These estimates were derived from data gathered through customer interviews. Customers ranked various pricing products, and the resulting rankings were subjected to conjoint analysis. One important caveat is that, in all but one interview, the data were derived from a standard model of customer choice that enforces the same preference functions on all customers. Once that assumption is relaxed, by using a more advanced model known as the mixed logic model, important information on the variation in customer preferences within segments is revealed. Thus, on average, customers may display a preference away from RTP and be willing to pay a higher flat price than go on a real-time price. However, several customers within each segment may have a preference toward RTP, and these customers can form the target population for the RTP program.
  2. This elasticity measures the percentage change in the ratio of usage in two hours that is induced by a one percent change in the corresponding price ratio. The elasticity is a negative number, but in popular writing the negative sign is dropped. Thus, a higher elasticity number indicates that customers are more easily able to substitute usage between hours.
  3. Personal correspondence with Pieter Brand, RTP Product Manager and Gold Sector Specialist, Johannesburg, South Africa, April 5, 2002.
  4. Vickrey, William, "Responsive pricing of public utility services," Bell Journal of Economics and Management Science, 2, 1971, pp. 337-346.
  5. Eric Hirst, "Price-Responsive Demand in Wholesale Markets: Why Is So Little Happening?" The Electricity Journal, May 2001.
  6. Of course, if the compensation is actually paid, then no one is worse off, and the program is Pareto Optimal.
  7. Nainish K. Gupta and Albert L. Danielsen, "RTP: Ready for the Meter? An Empirical Study of Customer Response," Public Utilities Fortnightly, November 1, 1998.
  8. Peter M. Schwarz, Thomas N.Taylor, Matthew Birmingham, and Shana L. Dardan, "Industrial Response to Real-Time Prices for Electricity: Short-Run and Long-Run," Economic Inquiry, forthcoming 2002.

Industry research yields new insights on RTP.

The benefits of real-time pricing (RTP) are well known, and include the mitigation of price volatility and market power in wholesale markets. 1 RTP promotes economic efficiency by giving customers a strong incentive to lower usage when hourly prices are high. This serves to reduce the threat of power outages. As Californians found out the hard way in the winter of 2001, blackouts are an inefficient way of rationing customer demand because they affect all customers equally, regardless of the value they place on electricity. They can impose significant economic costs, since customers often place a substantially higher value on electric service than the amount they pay in electric rates. The Electric Power Research Institute (EPRI) has estimated that the annual cost of power outages for California businesses ranges between $12 billion and $18 billion, and the