The Redistributional Impact of Non-linear Electricity Pricing

Severin Borenstein

NBER Working Paper No. 15822
Issued in March 2010
NBER Program(s):   EEE   IO

Utility regulators frequently focus as much or more on the distributional impact of electric rate structures as on their efficiency. The goal of protecting low-income consumers has become more central with recent increases in wholesale power costs and anticipation of significant costs of greenhouse gas emissions in the near future. These concerns have led to the widespread use of increasing-block pricing (IBP), under which the marginal price to the household increases as its daily or monthly usage rises. There is no cost basis for differentiating marginal price of electricity by consumption level, so perhaps nowhere is the conflict between efficiency and distributional goals greater than in the use of IBP. California has adopted some of the most steeply increasing-block tariffs in electric utility history. Combining household-level utility billing data with census data on income distribution by area, I derive estimates of the income redistribution effected by these increasing-block electricity tariffs. I find that the rate structure does redistribute income to lower-income groups, cutting the bills of households in the lowest income bracket by about 12% (about $5 per month). The effect would be about twice as large if not for the presence of another program that offers a different and lower rate structure to qualified low-income households. I find that the deadweight loss associated with IBP is likely to be large relative to the transfers. In contrast, I find that the means-tested program transfers income with much less economic inefficiency. A much larger share of the revenue redistributed by the IBP tariff, however, comes from the wealthiest quintile of households, so IBP may be a more progressive structure of redistribution. In carrying out the analysis, I also show that a common approach to studying (or controlling for) income distribution effects by using median household income within a census block group may substantially understate the potential effects.

download in pdf format
   (755 K)

email paper

A non-technical summary of this paper is available in the July 2010 NBER digest.  You can sign up to receive the NBER Digest by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15822

Published: Severin Borenstein, 2012. "The Redistributional Impact of Nonlinear Electricity Pricing," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 56-90, August. citation courtesy of

Users who downloaded this paper also downloaded these:
Ito w18533 Do Consumers Respond to Marginal or Average Price? Evidence from Nonlinear Electricity Pricing
Davis and Muehlegger w15885 Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing
Borenstein and Davis w16653 The Equity and Efficiency of Two-Part Tariffs in U.S. Natural Gas Markets
Reiss and White w9986 Demand and Pricing in Electricity Markets: Evidence from San Diego During California's Energy Crisis
Borenstein w12524 Customer Risk from Real-Time Retail Electricity Pricing: Bill Volatility and Hedgability
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us