Utilities Included: Split Incentives in Commercial Electricity Contracts

The largest decile of commercial electricity customers comprises half of commercial sector electricity usage. We quantify a considerable split incentives problem that exists when these large firms are on electricity-included property lease contracts. Controlling for a rich set of variables that may correlate with selection into contract type, we use exogenous variation in weather shocks to show that customers on tenant-paid contracts use up to 14 percent less electricity in summer months. The policy implications are promising. Nationwide energy savings from aligning incentives for the largest decile of commercial customers would substantially exceed savings from fixing the split incentives problem for the entire residential electricity sector. It is also cost-effective: switching to tenant-paid contracts via sub-metering has a private payoff period of under one year, and public benefits are significant. JEL: D22, L14, Q51