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California Experiment: Dynamic Pricing for the Mass Market

Will the state launch a full-scale rollout of dynamic tariffs?
Fortnightly Magazine - July 1 2003

of the customers will choose to opt-out of the voluntary experiment. The net sample of 2,060 is expected to include 1,500 residential customers and 560 small commercial customers. Four residential segments capture the variation in customer price response across the state's climate zones; the two commercial segments capture the variation by size (0-20 kW, 20-200 kW). About 100 residential PG&E customers will be given information on how electricity costs vary by time-of-use and will be notified when critical peak days are encountered. But they will stay on standard rates, enabling an assessment of the impact of pure information treatment. Customers on the variable CPP rate will be provided with enabling technologies to help them automate a change in energy use. Customers will be offered a choice of air conditioner, water heater, and pool pump controls.

Three Tracks

The experimental design encompasses three tracks, reflecting the diverse interests of the members of the CPUC's third working group, WG3. Track A includes about 1,500 customers selected through a stratified random sample. It is designed to provide both statewide and climate-zone specific price elasticity estimates for TOU and CPP rates. Track B includes about 200 customers selected through a stratified random sample in the Bay Area. It will measure the effects of increased awareness of local environmental and reliability issues on price elasticities for the CPP-F tariff. Track C includes about 360 residential and small commercial customers, selected from the existing population of SCE and SDG&E customers, who are participating in the AB 970 pilot program featuring smart thermostats.

The SPP is designed as a social experiment, with random assignment of customers to control and treatment groups. Unlike traditional pilot programs designed to "get the bugs out" of a new product prior to its market launch, an experiment needs to have internal and external validity. Internal validity requires that the experiment be capable of establishing a cause-effect relationship between its "treatments" and outcomes. External validity requires that the findings be capable of being applied to outside the participant population.

SPP has been designed to avoid several of the design flaws that are commonly in experimental research. Social experiments are subject to a variety of flaws, including:

  • Failure to include a control group, which makes it impossible to measure cause-effect relationships;
  • Use of a non-comparable control group, which converts the experiment into a quasi-experiment;
  • Use of nonrandom sampling methods, which makes it difficult to extrapolate results to the population;
  • The lack of pre-treatment measurements, which makes it difficult to eliminate the effects of weather and other confounding variables on the observed relationship;
  • Insufficient number of treatments, which makes it difficult to estimate price elasticities of demand;
  • Insufficient sample size by treatment group, leading to imprecision in the estimated elasticities;
  • Insufficient variation in the average daily price, making it impossible to separate own-price elasticities from cross-price elasticities;
  • Voluntary recruitment of participants, which can introduce self-selection bias in the estimated model parameters;
  • Making compensatory payments to participants, which could lead to biased estimates; and
  • The Hawthorne effect, which arises from the impact of experimental observation on participants.