EP 44

Paul Joskow, Jean Tirole

Retail Electricity Competition

EP 44 | Non-Technical Summary | PDF

Abstract: We explore the implications of load profiling of consumers whose traditional meters do not allow for measurement of their real time consumption. We find the competitive equilibrium does
not support the Ramsey two-part tariff. By contrast, when consumers are billed on real time prices and consumption, retail competition yields the Ramsey prices even when consumers can only partially respond to
variations in real time prices. We then examine the incentive competitive retailers have to install one of two types of advanced metering equipment. Competing retailers overinvest in real time meters
compared to the Ramsey optimum, but investment incentives are constrained optimal given load-profiling and retail competition. Finally, we consider the effects of physical limitations on the ability
of system operators to cut off individual customers. Competing retailers have no incentive to determine the aggregate value of non-interruption of consumers, preferring instead to free-ride on other retailers serving
the same zone.