Georgia Power and Dynamic Pricing

Perfect price discrimination relies upon individual consumers paying the maximum price they are willing to pay for the goods or services they receive. Dynamic pricing is “pricing that changes when the demand for something increases or decreases”, (dynamic pricing, 2006). Dynamic pricing can be a form of perfect price discrimination, often referred to as first-degree price discrimination, if it occurs when companies charge differing amounts for the same service, especially when using a model that considers the time of demand of consumption.

Jeffrey Perloff maintains that in order for a firm to perfectly price discriminate they must determine what an individual consumer’s reservation price is, (the maximum amount they are willing to pay), and they must have considerable information about their customers, (2007, p. 118). Electrical utilities operate as monopolies in most states and therefore have a tremendous amount of market power; however the prices that they can charge customers are regulated by the states in which they operate. Georgia Power, the electricity utility for the state of Georgia, has been successfully using a dynamic pricing model for industrial customers for almost twenty years. In order to charge different amounts they must determine when an industrial customer is using electricity during peak usage times. In order to determine this they installed “smart meters” which record hourly usage for industrial customers.

Georgia Power’s program is a two-part fee based program with standard rates for baseline consumption and hourly market rates added to this fee for consumption above this baseline amount, (Kosavanic & Engel, 2004). There have been significant benefits to Georgia Power and its industrial customers as wholesale market prices, which vary hourly, have dropped 17% since the meters were installed, (Colledge, Hicks, Robb, & Wagle, 2002). Industrial customers of Georgia Power can voluntarily shut down or scale back operations during peak billing periods, without affecting their overall output, by monitoring their usage during these peak-periods.

Recently there is evidence that Georgia Power intends to extend a dynamic pricing model to residential customers as well. Currently residential customers in Georgia can agree to allow Georgia Power to install a switch on their houses that is connected to their HVAC units in exchange for an initial $20.00 credit. During peak electricity use periods in the summer months Georgia Power will be able to send a signal to this switch limiting the amount of time air conditioning units will run. Each time that the power company flips this switch, consumers receive an additional $2.00 credit. Additionally Georgia Power began replacing traditional electricity meters with “smart meters” in January of 2008 on residences with the intention of enabling consumers in the future to manage their energy usage and control their own bills, (Southern Company, 2010).

While a dynamic pricing model for industrial consumption may benefit both Georgia Power and the industries that utilize this model, it remains to be seen that this model will benefit residential consumers. Unless specific provisions are made for those consumers with limited incomes, especially the elderly, the infirm, and the disabled, during the summer months these patrons could be forced to make difficult choices between utilizing medical equipment or the necessary operation of air conditioning units and paying increased electric bills. Additionally, oppressive summer heat could force residents who can no longer afford their power bills from their homes into the streets.


References:

Colledge, J., Hicks, J., Robb, J., & Wagle, D. (2002). Power by the minute. Power Economics , 2002(1), 73-81. Retrieved from EBSCOhost Business Source Premier.

Dynamic pricing. (2006). Dictionary of Business. Retrieved from http://www.credoreference.com/entry/acbbusiness/dynamic_pricing

Kosavanic, L. & Engel, D. (2004, May). Meeting the nation’s demand for power: a new take on demand programs. Energy User News, 29(5), 11-14. Retrieved from EBSCOhost
Business Source Premier.

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.
Southern Company. (2010). Your meter is about to get smarter. Retrieved from http://www.georgiapower.com/residential/smartmeter.asp