University of California Energy Institute

PWP-082r

Consumption under Noisy Price Signals:

A Study of Electricity Retail Rate Deregulation in San Diego

James B. Bushnell (UCEI) and Erin T. Mansur (Yale University)

Utility services employ nonlinear tariff structures that attempt, though occasionally fail, to convey information effectively on cost convexities. This paper examines how customers respond to noisy and volatile tariffs by measuring deregulated retail rates' impact on electricity consumption in San Diego. In 2000, when rates doubled over three summer months, consumers appear to have reacted more to recent past bills than to more timely price information. By summer's end, we find consumption fell 6% while lagging price increases. Even months after the utility restored low historic rates customers continued curtailing demand. We conclude that rate structures relying upon lagged wholesale price averages produce delayed responses to scarcities or high costs.

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