Borenstein, Severin “The Redistributional Impact of Non-Linear Electricity Pricing” (Revised April 2011) (Revised version published in American Economic Journal: Economic Policy, 4(3), August 2012.) | WP-204
Concern for low-income consumers has led many electricity regulators to adopt increasing-block pricing (IBP), under which the marginal price increases as the customer’s monthly usage rises. There is no cost basis for differentiating marginal price by consumption level, so IBP poses a classic conflict between efficiency and distributional goals. I derive estimates of the income redistribution effected by the country’s steepest IBP tariffs, which are in California. These tariffs cut the bills of households in the lowest income bracket by about 10% (about $5 per month). The effect would be about twice as large if not for the presence of a different tariff for low-income households that is means-tested. I find that the deadweight loss associated with IBP is likely to be large relative to the transfers, much larger than the means-tested program. I also show that a common approach to studying income distribution effects, using median household income within a census block group, may substantially understate the potential effects.