Strategic Rate Design: The Role of Industrial Tariffs

Abstract

Strategic rate design refers to the use of deliberate pricing strategies that alter customer demand in order to achieve certain strategic objectives. Often the objective is to defer or eliminate the need for additional generation capacity-and, to a lesser extent, transmission and distribution capacity. In the same way that "a penny saved is a penny earned," one can say that "demand reduced is capacity acquired." In some cases, the strategic objective may be something other than reduction in peak demand, such as promoting the economic development of a depressed region. In these cases some increase in peak demand may be tolernted, especially if the utility is already in an excess-capacity situation. Strategic rate design is also a tool to deal with the self-generating customer. Over the past 14 years, tremendous growth has occurred in cogeneration capacity in Texas. The utilities use their rate tariffs strategically to influence the growth of self-generation.