Household Preference for Interruptible Rate Options and the Revealed Value of Electric Service Reliability

Unbundling the attributes of electricity service is increasingly being recognized as a promising approach for dealing with capacity shortages, cost recovery and specific customer needs. Chao and Wilson (1986) elucidate this approach using the example of priority service options, which allow for the explicit pricing of a particular attribute - service reliability. A simple form of the priority service option is the interruptible rate analyzed by Woo and Toyama (1986). Unbundling service attributes and incorporating them into service options and rate design is particularly important when customers are heterogeneous. Customer heterogeneity implies that different customers will have different preferences about service attributes. Thus, customers will deferentially respond to and benefit from alternative service options. For example, one customer may find service reliability crucial, hence an outage is very costly. This customer's "outage cost" will be composed of a dollar measure of the discomfort caused by the outage, in addition to any out-of-pocket costs borne to relieve the discomfort. Should this customer's "outage cost" exceed the bill discount offered with a particular interruptible rate option, he will not and should not subscribe to the service option if it entails more outages than his current (firm) service. On the other hand, another customer may not find an outage particularly onerous or costly