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An Application of the Expenditure Function in Electricity Pricing: Optimal Residential Time-of-Use Rate Option

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  • Chi-Keung Woo

Abstract

Caves et al. (1983) recently reported that mandatory time-of-use (TOU) pricing for residential customers served by four Illinois electric utilities fails to pass the cost-benefit test. Gains in economic efficiency are outweighed by the relatively high TOU meter costs. An obvious alternative is to offer a TOU rate option for which customer participation is voluntary (see, for example, Woo et al. [1983, Section D] and Malko and Faruqui [1980, pp. 161-62]). The problem of optimal pricing under self-selection has been analyzed by Faulhaber and Panzar (1977), Panzar and Sibley (1978), and Mirman and Sibley (1980). Following these studies, this paper derives the optimal electricity prices when a customer can choose between paying the TOU rates and the full incremental costs of a TOU meter and remaining on a flat rate schedule. My approach departs from the earlier studies in using the expenditure function to characterize the optimization problem as described by Diamond and McFadden (1974).

Suggested Citation

  • Chi-Keung Woo, 1985. "An Application of the Expenditure Function in Electricity Pricing: Optimal Residential Time-of-Use Rate Option," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 89-99.
    • Handle: RePEc:aen:journl:1985v06-02-a07
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    Cited by:

    1. Seeto, Dewey & Woo, C. K. & Horowitz, Ira, 1997. "Time-of-use rates vs. Hopkinson tariffs redux: An analysis of the choice of rate structures in a regulated electricity distribution company," Energy Economics, Elsevier, vol. 19(2), pages 169-185, May.

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    JEL classification:

    • F0 - International Economics - - General

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