Monday, April 12, 2010
Is flat fair?
We held a conference last week on pricing schemes for utilities. The idea of using prices to either smooth out peak demand (and thereby cut capacity) or reduce overall demand has to meet two objections. One is that there are classes of people who have little choice about when they need to use power (eg night shift workers who need to run air conditioners to sleep during the day) or overall demands (eg most dramatically someone on an iron lung). Here the challenge is to identify such people. Some poor people (with a lot of kids) may use a lot of electricity. And some rich people (with second homes) may use very little (in that home). So identifying those in need is not as easy as it seems at first. One interesting suggestion (by Bill Hogan of Harvard) is to reverse the challenge. Assume everyone is needy and then identify those to exclude. That may be just as hard, but at least you err on the side of caution in throwing your net too wide. The other challenge is the claim that flat pricing is more equitable than other systems for pricing – like real time pricing (which charges based on the actual wholesale prince at the time of consumption) or inverted block pricing (which charges more the more you use). I don’t think this argument from equity is very easy to make. But that said, I do think there are arguments that can be made to support the idea that flat pricing and its competitors as alternative ways to share out costs which we can choose between based on primarily pragmatic grounds. Just because electricity is more expensive at some times of the day than others, does not automatically generate an argument that pricing should follow. We may choose to do so on policy grounds, but that in itself does not generate a moral argument. Here is a parallel. Heavy people and light people pay the same prince for airlines tickets. But it costs more to fly heavy people than light people. We could have a policy of charging by the pound and weighing at the gate. We don’t do that. Other considerations outweigh the benefits of doing so.