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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, , vol. 6(2), pages 89-100, April.
    • Handle: RePEc:sae:enejou:v:6:y:1985:i:2:p:89-100
    DOI: 10.5547/ISSN0195-6574-EJ-Vol6-No2-7
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