TY  - JOUR
AU  - Borenstein,Severin
TI  - Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12524
PY  - 2006
Y2  - September 2006
UR  - http://www.nber.org/papers/w12524
L1  - http://www.nber.org/papers/w12524.pdf
N1  - Author contact info:
Severin Borenstein
Haas School of Business
University of California, Berkeley
Berkeley, CA 94720-1900
Tel: 510/642-3689
E-Mail: borenste@haas.berkeley.edu
AB  - One of the most critical concerns that customers have voiced in the debate over real-time retail electricity pricing is that they would be exposed to risk from fluctuations in their electricity cost.  The concern seems to be that a customer could find itself consuming a large quantity of power on the day that prices skyrocket and thus receive a monthly bill far larger than it had budgeted for.  I analyze the magnitude of this risk, using demand data from 1142 large industrial customers, and then ask how much of this risk can be eliminated through various straightforward financial instruments.  I find that very simple hedging strategies can eliminate more than 80% of the bill volatility that would otherwise occur.  Far from being complex, mystifying financial instruments that only a Wall Street analyst could love, these are simple forward power purchase contracts, and are already offered to retail customers by a number of fully-regulated utilities that operate real-time pricing programs.  I then show that a slightly more sophisticated application of these forward power purchases can significantly enhance their effect on reducing bill volatility.
ER  -