Title: Optimal tariff design under consumer self-selection

Authors: Mika Räsänen, Jukka Ruusunen and Raimo P. Hämäläinen

Status: Energy Economics, 19, 1997, pp. 151-167

Keywords: Demand analysis, Dynamic pricing, Econometric methods, Optional tariffs

This paper considers the design of electricity tariffs to guide an individual consumer to select the tariff designed for his/her consumption pattern. In our model, the utility maximizes the weighted sum of individual consumers' benefits of electricity consumption subject to the utility's revenue requirement constraints. The consumers' free choice of tariffs is ensured with the so-called 'self-selection constraints'. We analyze the relationship between the consumers' optimal choice of tariffs and the weights in the aggregated consumers' benefit function. If such weights exist, then they will guarantee the consumers' optimal choice of tariffs and the efficient consumption patterns. We also analyze the welfare effects, by using demand parameters estimated from a Finnish dynamic pricing experiment. The results indicate that it is possible to design an efficient tariff menu with the welfare losses caused by the self-selection constraints being small compared with the costs created when some consumers choose tariffs other than those assigned for them.