29.10.02

BETA-TEST IT FIRST. Nobel Laureate Vernon Smith managed to raise the hackles of California Governor Gray Davis. Here's his brief summary of an incentive problem facing consumers of electric power:

"The typical consumer does not know how much he has purchased and what it will cost him until the end of the month when he gets his bill. If he should go to the trouble of looking at his meter at 3 p.m. on a hot summer day with the air conditioning on high, and the clothes dryer cranking away, he will note that the little monitoring wheels are spinning much faster than when he inspects it at 3 a.m."

And here, a suggestion:

"The nice thing is that technology is already available, or on the near horizon, that can make consumer demand as responsive to prices as consumers choose to make it when exposed to the reality of time-variable supply cost. In turn, a change in the pattern of investment in generator types will be encouraged. The need for peak plants that sit idle for most days of the year will be reduced."

In fact, such pricing methods are in place. Each summer, I sell Commonwealth Edison an option. They credit my electricity bill for $10 in each of June, July, and August. They have placed a switch on my central air conditioner. Should they wish, they can turn off my central air conditioner, and only my central air conditioner, for up to three hours. By turning off central air conditioners, they avoid having to turn on an expensive power plant (or buy on the spot market at a high price.)

The use of time-of-day pricing has lots of applications and analogies. An interesting new variant is a priority price at the amusement park: evidently for $10 a guest at Great America can buy the right to enter a shorter line at up to five rollercoasters. I'm going to have to look more carefully at this, but it suggests incurring the additional transaction costs to sort riders has become worth doing. A few years ago, it was the other way around, it's only people of a certain age who remember what "a real E ticket" used to refer to.

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