Welfare Analysis of Electricity Rate Changes

Time-of-use (TOU) electricity rates generally require added metering costs; therefore, introducing TOU rates presents a legitimate issue in benefit/cost comparison. Furthermore, the PURPA standard of the 1978 National Energy Act requires such a comparison. This Note articulates the appropriate criteria for evaluating a switch to TOU rates from a non-TOU rate structure. It presents the case for a measure based on welfare economics, employing changes in consumer surplus and producer surplus, and contrasts that criterion with one based on changes in utility costs, as measured by either fuel savings or fuel and capital savings. The Note provides a practical illustration using residential load data to demonstrate the evaluation error that results from a fuel savings criterion. Empirical estimates of price responsiveness by residential customers are drawn from the Los Angeles Electricity Rate Study, published in Sanford V. Berg (ed.), Innovative Electricity Rates: Issues in Cost-Benefit Analysis, Lexington Books, 1983.