10/15/2010

Welfare Impacts of Single-Provider Residential-Electricity-Service Price

Discrimination

Heuristic Design for Testing a Topology-Based Monte Carlo Simulation of Household Electricity Service in a Midwestern U.S. Market

Dan HamblinPresident, Dan Hamblin & Associates, Inc.

What are the heuristic scenario dimensions?

• The UDC customer contract – Standard Offer (IO1) or More Than a Standard Offer (IO2)

• UDC retail price behavior – never below cost (IP1) or below cost at will (IP2)

• The live player problem – Strong with 2-yr. flat rate (P1), Weak player with 2-yr. flat rate service contract (P2), Strong player without flat rate (P3)

2What else changes?DH&A Inc.

Base load wholesale power can be natural gas + nuclear (HIGH) or else coal + nuclear (LOW)

3What is the purpose of the experiment?

DH&A Inc.

DH&A Inc. Let’s look at the two LOW base-load price examples.

4

Do customers want Energy Star technology and service bundles promoted by the UDC?

• Beefed-up conservation assistance easy to implement

• Helical fluorescent bulbs• Energy-efficient refrigerator/freezer• 2-way customer/utility datacom that switches

appliances from peak- to base-load rates• Photovoltaic roof panels with net metering• Energy-efficient, water-conserving, clothes’

washing machine

Price discrimination profit per customer per month is high while entire-year consumer surplus is small and

producer’s surplus is always negative.

DH&A Inc.5and suppose we let coalition partners

start and maintain price wars?

Price wars lessen the good news for customers and increase the bad news for the producer.

DH&A Inc. 6We have seen the LOW-priced half of 12 heuristic scenarios.

What were the stars among non-player coalition-partner technology service bundles & were they Energy Star’s?

DH&A Inc. 7

Overnight costs were $16,537.50 or $33,075 for use under Kansas

City, MO sunlight.

1. Improved customer service (129.2%)

2. Bundled electricity, water, & natural gas service with consolidated billing (125%)

3. Net-metered photovoltaic panels randomly sized at 1.575 or 3.15 kW DC (120.8%)

What is the bad news and the good news?

8Shadow prices produced these results.

DH&A Inc.

• Intransigent customers prefer the current contract.

• Energy Star promotion costs little, while gaining customer acceptance.

Are there some messy details we might like to know?

9What about Paul Joskow’s Basic Electricity Service mandated for a new customer’s first year?

DH&A Inc.

• Random choice of what to do in coalition partner portfolios as per Gary Becker

• Derived consumer surplus estimates reflect Hicksian income compensation

Default service attracted existing customers as well!

DH&A Inc. 10Nash coalition or Von Neumann-Morgenstern solution from Heuristic Scenario P2, IO1, IP1?

No Nash coalition beats the UDC Standard Offer but the Cartel coalition with side payments is the

Von Neumann-Morgenstern solution

Side payments UDC Profit (NPV)

in $/customer per month

(-) Side payment to Coalition partner 1

(-) Side payment to Coalition partner 3

(-) Side payment to Coalition partner 7

Pareto Efficient Profit - Coalition

Partner 1

Pareto Efficient Profit - Coalition

Partner 3

Pareto Efficient Profit - Coalition

Partner 7None $17,100,459.08 $74.01 -$5,584.96 -$58.98 -$10,888.89 $5,586.29 $92.73 $11,427.21

to partner 1 $17,094,874.12 $73.98

to partner 1 & 3 $17,094,815.14 $73.98

to partner 1, 3, & 7 $17,083,985.23 $73.93

UDC profit as a percentage of market profit

UDC profit as a percentage of market profit after side payments

99.71%

99.61%

Coalition Partner$/customer per month

UDC -$113.161 $0.002 $36.423 $0.984 $79.235 $0.006 -$5.987 $145.928 $0.00

Total $143.41

Without side payments to coalition partner slots 3 & 7, the VN-M total would be -$8.30.

11DH&A Inc.

10/15/2010 Thanks for the opportunity to give these concepts the red face test.

12

Heuristic Design for Testing a Topology-Based Monte Carlo Simulation of Household Electricity Service in a Midwestern U.S. Market

A presentation by Dan Hamblin, President of

t: 260.436.8577 f: 260.436.8611e: danhamblin@shadowprice.com

w: www.shadowprice.com

Welfare Impacts of Single-Provider Residential-Electricity-Service Price Discrimination

Bonus slide tells what happens if player relies on price alone

13DH&A Inc. Do-nothing player gives same result