Date of Award

8-1-1973

Document Type

Thesis

Degree Name

Master of Science (MS)

Department

Marketing

Abstract

This thesis represents an attempt to evaluate the effects which would result from the inversion of electric power tariff structures. Tariff relationships are presently based upon both the cost and value of service. The unit price for electricity presently decreases as monthly consumption increases.

Electric utilities are required to: (1) supply all reasonable demands for service by those who can pay for it, (2) provide service adequate to the needs of customers, (3) price such service at reasonable rates and without unjust discrimination.

The demand for electricity is a segment of the demand for energy of all types. Growth in the demand for energy has been closely related to economic growth in general. Total annual sales of electricity have been roughly doubling every ten years since the 1920's.

Unit prices of electricity experienced a declining trend until 1970. In the late 1960's, electric utilities began asking for general rate increases, which caused the reversal of this trend. Proponents of inverted rates assume that the demand for electricity is sufficiently elastic to respond noticeably to the price charged per kilowatt-hour. Factors which affect the elasticity of any product include: (1) the product's cost in relation to the total family or business budget; (2) the availability of substitutes; (3) the degree of necessity attached to the product; (4) the extent to which the customer realizes how much he is paying for a given product or service; (5) the length of time a given price has been in effect.

The basic conclusion drawn from this study is that the demand for electricity is not sufficiently elastic with respect to price to respond appreciably when an inverted rate is applied. The reasons for this conclusion are as follows:

(1) The relative amount spent on electricity by both residential and industrial users is small.

(2) It is possible to use substitute forms of energy for some uses of electricity. These substitute forms of energy are in shorter supply than is electricity, however, and the price of substitutes is expected to increase faster than is the price of electricity.

(3) Consumers of electricity do not think in terms of cost per kilowatt-hour but in terms of dollars spent on electricity per month. They have little knowledge about the unit or monthly operating cost of various uses of electricity.

Under the circumstances listed above, the inversion of electric tariffs appears to have little effect on the consumption of electricity.

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