How Do Consumers Respond to Water and Electricity Pricing?

Transcription

1 How Do Consumers Respond to Water and Electricity Pricing? Evidence from Recent Empirical Studies in Economics Koichiro Ito SIEPR Postdoctoral Fellow Stanford University Assistant Professor, Boston University (from July 2013)

2 Two Common Assumptions in Demand Estimation and Forecasting 1) Consumers fully understand their price schedule 2) Economic theory tells us that consumers respond to marginal price 6 5 Marginal price ($) per CCF Monthly consumption relative to baseline allocation (%) Example: Nonlinear Residential Water Pricing in Irvine Ranch Water District in CA 2

3 Potential Problems about the Two Assumptions 3

4 Consumers Are Not Well Informed about their Water or Electricity Prices

5 Consumers Are Not Well Informed about their Water or Electricity Prices Easy to see what gas price you are paying

6 Consumers Are Not Well Informed about their Water or Electricity Prices Easy to see what gas price you are paying Hard to see what water price you are paying

7 Typical Utility Bills: Difficult to Understand Example: An Electricity Bill in California 7

8 Typical Utility Bills: Difficult to Understand Example: A Water Bill in California 8

9 Given this environment, Do Consumers Respond to Correct Marginal Price? 9

10 I Examine How Consumers Actually Respond to Water and Electricity Prices Partnered with Water Utility (Irvine Ranch Water District) in CA Partnered with Electricity Utilities in CA Household-level monthly billing data for about 10 years Electricity consumers: 40,749 households Water consumers: 64,601 households Quasi-experimental research design Use policy changes as natural experiments Exploit spatial discontinuities to create treatment and control groups 10

11 In Orange County CA, Households in the Same City Have Different Power Companies Edison (Southern California Edison) provides electricity for the north side Laguna Woods Mission Viejo Rancho Santa Margarita Aliso Viejo Laguna Hills Las Flores Cote de Coza Laguna Beach Laguna Niguel Border of Electric Utility Service Areas City Limits San Diego (San Diego Gas & Electric) provides electricity for the south side 11

12 They Experience Very Different Pricing 25 Edison 20 San Diego Monthly Consumption Average Price = Total Bill Payment / Total Usage 12

13 Similarly, Exploit Policy Changes in Irvine Ranch Water District (IRWD) 13

14 Residential Water Pricing Changed from Flat Pricing to Nonlinear Pricing 6 5 Marginal price ($) per CCF (2) After Policy Change (Nonlinear) 0 (1) Before Policy Change (Flat) Monthly consumption relative to baseline allocation (%) 14

15 What Do I Find? 15

16 Findings: Both Water and Electricity Consumers Respond to Average Price (not Marginal Price) 25 Marginal Price (cents per kwh) MP AP Demand Curve Monthly Consumption 16

17 Why Do We Care about the Findings? 1) Responding average price weaken the incentive for conservation 2) Forecasts based on marginal price might be biased 25 Marginal Price (cents per kwh) MP AP Demand Curve Monthly Consumption 17

18 So, What Can We Do? 18

19 The Key is: Providing Better Price Information 19

20 In My Other Research, I Provide In-home display for Electricity Consumers 20

21 Using the In-home display, Consumers Can See Real- Time Information about Price and Usage Price per kwh (JPY) Time of the day 21

22 Randomized Field Experiment Random Assignment Treatment Group Households Control Group 22

23 When Consumers Have Clear Price Information, They DO Respond to their Price Incentives Correctly Dynamic Pricing Group (Orange) and Control Group (Green) Log of Electricity Use per 30 minute interval Time of the day 23

24 Similar Findings from Other Studies: Providing Better Information is the Key Teaching Income Tax Code: Chetty and Saez (2013) Other Evidence from Electricity Pricing Wolak (2011), Jessoe and Rapson (2012), Kahn and Wolak (2013) 24

25 Summary: What Can We Learn from Recent Economic Studies? 1) Not-clear price information --> Consumers don t get right price signals Evidence: both water and electricity consumers respond to average price Wrong price signals --> weaken incentives for conservation 2) Providing better price information is the key Evidence from electricity pricing and income taxation Consumers respond to price signals correctly when they receive clear info 3) Discussion How can we improve the clarity of water price information for consumers? 25

26 Thank you for your attention Koichiro Ito SIEPR Postdoctoral Fellow Stanford University