Industrial and Commercial Customer Response To Real Time Electricity Prices

Executive Summary This paper uses hourly data from industrial and commercial customers that volunteered to participate in Central and Southwest Service's (CSW) real-time pricing (RTP) programs to characterize the induced price response. The CSW RTP program, which adopted the two-part, revenue neutral design first introduced by Niagara Mohawk, was introduced to large commercial and industrial customers in Oklahoma 1994, and later in other jurisdictions. This study used summer months' price and usage data for the period 1998-2001. Most of the participants had gained substantial experience managing load under RTP by 1998, and this period was characterized by considerable price volatility. CSW allowed customers to choose from two RTP designs. Under the RTP program, a two-part, revenue neutral design, nearly identical to that introduced by Niagara Mohawk in 1988, participants received an hourly price schedule by 4:00 the day before it was effective. The RTP prices were used to settle variations in the following day's hourly energy usage from the customer's CBL. The CBL is an hour-by-hour representation of what the customer is deemed to have consumed on the standard CSW tariff otherwise applicable to the customer. Following established practice, CSW 2 established the CBL from each customer's historic usage. By construction, under this design participants are fully hedged against hourly RTP price variations at their typical load, but face prices that induce changes that result in economic efficiency improvements. Alternatively, customers could elect the RTP-LR option, whereby they nominated some of the CBL for additional, short-term hourly price exposure in return for a corresponding reduction in the tariff demand charge. For these participants, the day-ahead prices were provisional. CSW could, within specified limits, adjust their hourly prices upward by $38/kWh with only a single hour's notice, and simultaneously reduce their CBL by the amount of nominated load. Since these customers face greater price exposure, they were expected to be more price responsive. The price and quantity records of 54 participants were analyzed, of which 39 were enrolled in RTP for all three years, nine were in a program for two of the three years and six participated for a single year. A total of 43 customers enrolled in the RTP program, while 11 customers enrolled in a companion RTP-LR program. The study makes two important contributions to understanding of RTP participants' response to RTP prices. First, by adopting a demand model that allows price response to vary with the level …