Energy Tariffs: Increasing block pricing, household group segmentation and distributional characteristics

The paper models the implementation of increasing block pricing (IBP) coupled with household group segmentation by incomes (high, middle and low) and find necessary conditions for use of progressive block prices and fixed charges based on the distributional characteristics of blocks. It evaluates the recent combination of IBP and group segmentation in residential electricity and natural gas in Argentina using current rate schedules for the Metropolitan Area of Buenos Aires and microdata from the latest Household Expenditure Survey. The findings indicate that those conditions are not validated by the data and estimates and do not justify IBP of fixed charges and marginal prices across blocks within a given household group. Additionally, inconsistencies are observed across groups, with the rate structure (fixed charges for both electricity and natural gas, and block prices for electricity) of the middle-income group being unduly close to that of the low-income group. The analysis provides some justification for the discrimination in natural gas (distribution) prices between Buenos Aires City and Greater Buenos Aires within a given group, due to income disparities between households in both areas. The study suggests a direction of reform towards smaller dispersion of energy prices across groups so as to reduce subsidies and advocate for a shift from IBP to a Two-Part Tariff, incorporating lump sum redistribution across groups.