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Service Reliability and the Optimal Interruptible Rate Option in Residential Electricity Pricing

Recent research on electricity pricing extends the traditional peak load pricing problem in many directions. Some notable studies include the time-of-use (TOU) papers by Crew and Kleindorfer (1976, 1978); the cycling analysis by Dansby (1977); the Demand Subscription Service (DSS) studies by Tschirhart and Jen (1979), Panzar and Sibley (1978), and Marchand (1974). Central to these papers is the role played by demand uncertainty in determining the optimal electricity rate structure and capacity planning. With the exception of Tschirhart and Jen and Marchand, these papers do not directly address the question of service reliability from the customer's perspective. Moreover, the supply-side uncertainty caused by random plant outages (as indicated by Chao, 1983) is largely ignored. Finally, these studies, though elegant and innovative, do not analyze the problem of residential rate options, which recently have gained considerable popularity in the United States, especially in California.

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Energy Specializations: Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q40: Energy: General, D12: Consumer Economics: Empirical Analysis, L94: Electric Utilities

Keywords: Residential electricity pricing, Service reliablity, Optimal interruptible rate option, TOU pricing, Rate structure

DOI: 10.5547/ISSN0195-6574-EJ-Vol7-No3-10

Published in Volume 7, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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