Estimating Residential Electricity Demand Under Declining-Block Tariffs
An Econometric Study Using Micro-Data
Declining-block rates for electricity may cause bias in empirical investigations of demand because the marginal price per unit of electricity is not constant. This study was able to measure the marginal price faced by households, control for eight major appliances, and take account of weather variations by adopting a disaggregated approach to estimating demand equations. It is based on micro-level data for 3825 geographic areas in Los Angeles County. Own price elasticities of demand range from -.35 in two-year pooled samples of cross-sections to -.70 in cross sections for a single billing period. Income elasticities of demand are found to be approximately .40. Natural gas is found to have a cross-price elasticity of .75 to .90. In the long run, changes in major variables will alter the stock of appliances as well as utilization patterns and result in larger elasticities than estimated by this study. These improved empirical estimates permit richer and more accurate policy analysis of rate changes.