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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

would in an RTP setting, but on a monthly basis. No hourly meters were in place, and load profiling was used to compute their monthly bill.

Regulatory Barriers: The Morality of Pricing

The concept of RTP originated with William Vickrey in 1971, when he wrote a groundbreaking article on "responsive pricing." Vickrey, who went on to win the Nobel Memorial Prize in Economic Sciences in the late 1990s, wrote that "the main difficulty with responsive pricing is likely to be not just mechanical or economic, but political." He felt that people shared the medieval notion of a just price as an ethical norm, and that prices that varied according to the circumstances of the moment were intrinsically evil. He opined prophetically:

In a similar vein, veteran energy analyst Eric Hirst noted recently, "the greatest barriers are legislative and regulatory, deriving from state efforts to protect retail customers from the vagaries of competitive markets." 5

One of the key barriers among regulators relates to fairness and distributional concerns. Not every customer would benefit from a switch to RTP, and some customers would be at a disadvantage. Those who consume large amounts of energy during peak times would be disadvantaged because they would lose their subsidy from the other customers. Recently, Puget Sound Energy was unable to get regulatory approval for its tracker rate, which would have given customers a daily price signal layered on top of a traditional four-period time-of-use rate. There was a concern that many customer segments comprised of elderly customers or low-income customers would be harmed by the real-time component of the rate. Unfortunately, a policy that seeks to make no one worse off will imprison us in the status quo.

We need to search for a more forward-looking way of thinking. Policy makers have to devise a framework for balancing the competing demands of greater efficiency against the political pressures of special interest groups. What insights can be derived from the vast literature on welfare economics? According to the well-known Kaldor-Hicks criterion, if the gainers from a public policy can compensate the losers, the policy may be worth pursuing, even if the losers are not compensated. 6

A related topic is whether market-based load curtailment programs can co-exist with RTP. Should customers who volunteer for a load curtailment program be excluded from receiving service on a real-time basis? Would this constitute double dipping? Or would it be a cost-effective way to obtain additional load shifting without having to make any additional investment in control technologies?

A third topic relates to a perception that RTP will seriously inconvenience customers because they cannot reduce peak usage or shift load from on-peak to off-peak periods. What is the best way to convince regulators that customers can indeed be trained to shift their loads from on-peak to off-peak hours? It would be useful to conduct a series of seminars and workshops for regulators, utilities, and prospective customers, in which customer case studies from other parts of the country would be featured.

Finally, a fourth issue arises from California's situation, in which the state