Rob LetzlerPhD, Goldman School of Public Policy UC Berkeley
Abstract: This project extends the idea that we should address policy problems by improving incentives to add that aligning the incentives' presentation with the way people make economic decisions can help people make better choices and help achieve policy goals. It applies ideas from behavioral economics to design practical electricity pricing policies. The cost of generating power fluctuates enormously from hour to hour but most customers pay time invariant prices. The mismatch between the fluctuating generation cost and the fixed retail price creates billions of dollars in deadweight losses. Customers who participate in Critical Peak Pricing (CPP) programs use less power during high-priced periods than do customers on traditional, time invariant rates. CPP customers report high satisfaction levels and often save 10% or more. Yet, roughly 99% of customers reject opportunities to switch to critical peak pricing. The psychology literature documents heuristics that people use to decide under risk. The conventional CPP presentation leads several of these heuristics astray. For example, customers using these heuristics would put too much weight on the risks and losses involved with paying more to get less during the high priced ``events'' relative to the weight they put on their steady stream of savings. This paper departs from the hypothesis that one or more of these heuristics underlies customer resistance. Hence, I suggest Incentive Preserving Rebates that change the presentation of CPP to address these heuristics. Incentive Preserving Rebates reframe events as opportunities to get rebates rather than as periods of extremely high prices. Incentive Preserving Rebates change the presentation, but change neither marginal incentives nor each customer's total annual payments. I then explore the implications of incentive preserving rebates for customers who participated in a California pilot program.
The Impacts of Residential Critical Peak Pricing: Evidence from California's Statewide Pricing Pilot California's Statewide Pricing Pilot (SPP) explored the impact of switching residential customers from conventional, time-invariant electricity rates to Critical Peak Pricing (CPP). CPP lowers prices most of the time, raises prices modestly during weekday afternoon peak hours and raises prices dramatically during rare "critical" periods. CPP rates better reflect significant hour-to-hour variations in the cost of generating power. California SPP customers were socioeconomically diverse and lived in diverse climate zones. This paper takes a flexible, difference-in-difference approach to estimating the impacts of the statewide pricing pilot and provides evidence about who is likely to respond the most to CPP when. It finds that dynamic pricing led to larger consumption reductions on hotter days and for larger customers. It estimates that the benefits of dynamic pricing range from zero in cooler climates on cooler days to .3 (.4) kW every hour for increased afternoon ("critical peak") prices on the hottest days in hot climates. A program designed to address extreme electrical demand on hot summer days worked best in regions where most customers had air conditioning on days when temperatures above about 90 degrees prompted them to run their air conditioners. Thus, targeting marketing efforts at high-consumption customers in hot regions has the potential to increase the program's cost-effectiveness.
Full dissertation: Implementing Opt-in, Residential, Dynamic Electricity Pricing: Insights from Economics and Psychology
with George Athanasakopolous. Presented at the Economic Science Association, June 2006.
We provide experimental evidence that the set of subjects who are predisposed to free ride, reported in economics public goods experiments, are the high Machiavellian ("high Mach") types reported in the psychology literature. The public goods literature reports the presence of subjects who are predisposed to free ride ("free riding types") and the presence of subjects predisposed to cooperate and to punish free riders ("cooperative types"). Experiments suggest that institutional rules determine the balance of power between free riding and cooperative types and that this balance of power determines would-be free riders' contribution levels. We compare the behavior of high and low Machs in a voluntary contributions game and find that high Machs make a significantly higher number of unprovoked defections than low Machs. If free riding (cooperative) types are high (low) Mach types, economists can tap the psychology literature's descriptions of high and low Machs' social preferences and situation-dependent behavior to design better social preferences experiments and public goods institutions. For example, it means that the challenge of reaching good public goods deals is the challenge of creating tools to create and enforce norms that are strong enough that high Machs will not violate them.
When I escape work, I am a serious amateur photographer and am a member of the GSPP Alumni Association where I served on the national board 2008-2014,