Two by Four, not a Nudge
David Boonin is president of TBG Consulting and has over forty years of experience as a public utility economist synchronizing the interests of utilities, regulators and other stakeholders in the electric, gas, water and transit industries. Boonin served as a principal for the National Regulatory Research Institute, member of the Philadelphia Gas Commission, chief economist at the Pennsylvania Public Commission, and corporate economist for United Illuminating.
Last month I stressed this neo-classical economic public interest goal of rate design. Set efficient price signals. Then adjust them based upon constraints of revenue requirements and secondary goals of saving the environment, stimulating the economy, making electricity affordable, etc.
Efficiency is paramount. This is true. However, those of us who have suffered through Econ 101 might think that there is a precise equilibrium price that creates an optimally efficient market.
Some might think that tweaking rates is all that is needed. This is false. Effective rate design must get customers’ attention. It is not a precise science that should be constrained by gradualism.
We sense things about electric consumers’ behavior. People don’t change their consumption patterns or levels because of small changes in prices. They need a real kick in the pants.
At least by ten percent in my experience, from selling competitive retail electric services.
It takes time for people to adapt to new rate designs. Busy people don’t get excited by a change that moves their cost of electricity from two dollars and fifty cents to two dollars and sixty cents per day.
And lags between consumption and billing break the link between price and consumption.