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A Note on Measuring Household Welfare Effects of Time-of-Use (TOU) Pricing

Several recent studies address the issue of household welfare effects caused by the implementation of time-of-use (TOU) pricing of electricity (for example, see Aigner and Lillard, 1982; Aigner and Learner, 1982; Parks, 1983; and Caves et al., 1983). In these studies, the historical average price is used to assess the household welfare change. Implicit in their approach is the assumption that the original electricity rate structure is a flat one. In fact, however, the common rate structure is multitier, frequently an inverted block. While the literature on demand for electricity includes extensive discussions of whether the average price or the marginal price is the correct price signal to a residential customer (e.g., Taylor, 1975; Nordin, 1976; Terza and Welch, 1982; and Billings, 1982), little attention has been given to evaluating welfare change resulting from TOU pricing.

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Energy Specializations: Electricity – Policy and Regulation

JEL Codes:
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Electric utilities, TOU pricing, Welfare effects, Electricity prices

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No3-12

Published in Volume 5, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.