Simulation of the Demand for Electricity Under Alternate Rate Structures

Abstract

This paper reviews the theory of price specification and considers the comparative static analysis of demand subject to alternative rate schedules. An econometric analysis of the 1975 Washington Center for Metropolitan Studies survey resolves four empirical issues related to the estimation of the demand for electricity: (1) measured average price and measured marginal price are statistically endogenous so that least squares technique s are not appropriate for the determination of price and income elasticities, (2) while the rate structure premium (RSP ) has established theoretical merit its statistical contribution is negligible, (3) consumer behavior in the demand for electricity follows the marginal price rather than the average price specification, and (4) estimates of price responsiveness are not statistically different using the tail-end price rather than the true marginal price. We demonstrate a practical way of making probabilistic comparisons between alternative rate schedules which is applied in several examples to illustrate the prevalence of block switching. The methodology is easily applied to inverted tariff schedules even when structural parameters have been determined from a cross-section of individuals who face declining block rates.

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