Working Paper: NBER ID: w26385
Authors: Arik Levinson; Emilson Silva
Abstract: Efficient electricity pricing involves two-part tariffs: a volumetric price equal to the marginal cost of producing an additional kilowatt hour (kWh) and a fixed fee to cover any remaining fixed costs. In this paper we explore how US electricity regulators depart from this simple two-part tariff to address concerns about income inequality. We first show that in theory, price setters concerned about inequality will charge lower fixed monthly fees and higher per-kWh prices, and increasing block prices to target higher users with even higher prices. Then we use a new dataset of 1,300 utilities across the US to show that these theoretical predictions are borne out in practice. Utilities whose ratepayers have more unequal incomes levy more redistributive tariffs, charging less to low users and more to high users. To quantify these comparisons, we develop a new measure of the redistributive extent of utility tariffs that we call the “electric Gini.” Utilities with higher electric Ginis (more redistributive tariffs) shift costs from households that use relatively little electricity to households that use more. But because electricity use is only loosely correlated with income, that redistribution does not meaningfully shift costs from households with low incomes to those with high incomes.
Keywords: Electricity Pricing; Income Inequality; Redistribution
JEL Codes: Q41; Q48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Utilities serving customers with less equal incomes (L97) | More redistributive electricity tariffs (H23) |
| Higher electric ginis (L94) | Higher income ginis among ratepayers (D31) |
| Utilities serving households with income gini coefficients 0.1 points higher (R29) | Electric ginis that are 0.007 to 0.015 points higher (L66) |