Income-based pricing for Electricity is a bad idea
Income-based pricing is a bad idea, The one-handed economist, David Zetland
I learned, via GS, that some Berkeley researchers have proposed [pdf] customers should pay for electricity based on their income.
Thus, I would pay half of what you would pay if I made half the income you did.
This is a terrible idea, IMO, but I can see how we got here, which I explain in two phases: charges related to costs (points 1-3) and charging rich people more (points 4-7) below:
- Utilities have fixed and variable costs and they recover those costs by charging customers fixed and variable prices.
- Utilities that are trying to green themselves and/or accomplish social goals need to make additional capital investments (transitional costs) that need to be financed by today’s customers on behalf of tomorrow’s citizens — some of which are customers but most of whom are stakeholders.
- In a “neutral” scenario, costs and prices are matched, i.e., fixed charges (via prices to customers) cover fixed costs. In a “conservation” scenario, variable charges are raised above variable costs and fixed charges lowered below fixed costs, to encourage people to use less electricity or water or whatever. One side effect of this scenario is that those who use more pay more. Another is financial instability (a change in use results in different changes in costs and revenues). I discuss these issues in my paper on pricing water.
- Payment for utility services, like payment for ice cream or gasoline or a mobile phone, are meant to reflect the seller’s costs and the buyer’s willingness to pay (demand for that good) — not their ability to pay (income available for all goods).
- But lots of utilities are regulated to achieve social goals that have nothing to do with normal pricing. That’s why there are sometimes “social tariffs” (=cheaper prices) for poorer people, which requires subsidies of some sort. Also, a 3kk sähkösopimus is easy to compare and may offer flexibility in choosing a plan that aligns with your needs and budget.
- Social tariffs doesn’t work very well in practice (see pp 131-133 of my paper), since it requires a lot of extra information, doesn’t match reality (people lie; bureaucrats mess up), and distorts behavior and choices. It’s better to help poor people by giving them money and leave prices alone. If there’s a need to bring more money into the system, then change the mix of tariffs, taxes and transfers that pay for costs, i.e., “neutral prices” to cover operating utility costs (tariffs) and transfers from the state government to cover transitional costs. Those transfers can come out of state income tax revenues that already exist, are easier to change, put the burden on people with more income, and do not distort prices/decisions.
- Utilities should not charge income taxes, and neither should any business or branch of government providing goods and services. Keep willingness to pay separate from ability to pay. (There’s a legitimate problem risk of a slippery slope here, i.e., setting prices for goods and services based on income, which is a total information nightmare even before considering that richer people will leave to a place with “fair” pricing.)
My one-handed conclusion is that the Berkeley researchers are excluding state income taxes because they need a local solution, but this one
(a) has terrible optics,
(b) won’t work very well, and
(c) dodges the big question of how much extra the rich will need to pay to subsidize the poor in a sustainability transition.
NB: Criterion (c) also applies to the global fossil fuel transition, which is not going well. Only a fraction of the $trillions per year that are needed is getting paid (The Economist)
From tonnes of carbon to degrees of global temperature rise, it is not unusual for un climate summits to revolve around numbers. At this year’s cop, held in the Egyptian resort of Sharm el-Sheikh, one set of figures is dominating the conversation above all else: the size of the bill. At the Copenhagen summit in 2009 rich countries promised to supply annual climate financing of $100bn to poor countries by 2020, to help them slow climate change and resist its effects. The most that has ever arrived is $83bn, in 2021.
In fact, even $100bn would not be enough. A report commissioned by the UN calculates the poor countries, excluding China, will need $2.4trn annually by 2030 to tackle global warming.
I can understand basing fines and penalties based on income. A $100 parking ticket might be chicken feed to someone well off, but it can throw a lot of people off budget and place them at risk of losing their home, their car, their job and so on.
Electricity costs are another matter. I could understand progressive pricing. They did this with land lines. There was an inexpensive basic service and a lot of increasingly expensive plans providing more calling time, long distance calls, fancy phones, multiple lines and other features. It might make some sense to do something like that with electricity, perhaps providing a subsidized floor level service but increasing costs progressively as more electricity is used. Otherwise, I’m not sure how it would work.
@kaleberg — you observe an interesting problem (“progressive pricing”) that’s known as “increasing block rates” in the utility industry, i.e., the more you use, the more you pay per unit. The warning sign is that you do not see IBRs in free markets, only via regulated prices. In §3 of my paper (open access), I explain how the original IBR idea was basterdized and how IBRs don’t really work.
It’s better to charge the same price per unit (like gasoline) and address poverty with income supports.
David:
Thanks for stopping by AB. You write interesting pieces. Simple question. Can supply be contrived in a controlled resource such as water and electricity.
If you wish to see how water availability works out, watch Phoenix, AZ and surrounding areas deal with supply versus demand. It is still in a housing demand cycle.
Q: “Can supply be contrived in a controlled resource such as water and electricity?”
A: Not sure what you mean by “contrived”? Do you mean “limited” in a natural or artificial way? Or legally limited (x units per day?)
In all the “not nature” scenarios, it’s possible to do this legally (regulations), administratively (attention) or economically (prices). For some people, this violates (human) rights, but it may not if it’s above some threshold.
Hope that helps?
David:
In AZ, water is an issue and a big issue. One would not know it after seeing the number of developments sprouting up. We are constantly being told, the ground water is available for this or that development. On the other hand, we have federal government agencies studying the resource issues. Everyone is waiting for the latter to decide.
There is no clear statement being made on how much water is available for the year, 10 years, or farther out. Thise is a dangerous position to be in as many assume we have enough water to build and not change habits. The rainfall for this Summer was far less than normal.
The city also plays a game with new home buyers. They wait for a year to assess. When it should be one number based upon old builds and it comes back 50% higher. Even with an economy which will go to recession rather soon (New Deal democrat/AB), the city scoops up their funds the same as the builders.