Peak-Load Pricing

Electric utilities rightly view price discrimination as critical to the success of their business. Residential customers may be dismayed to discover that the electric company routinely charges industrial users of electricity significantly lower prices. In some circumstances their may be a countervailing benefit when residential customers are prioritized when the lights go out. But if you're unlucky enough to live miles away from the nearest company executive, your lights may stay out for more than a week at a time in the event of a disruption.

Electric utilities produce a more or less constant supply of power all day long. At the peak of daily energy usage, when air conditioners are drawing maximum energy all over town, the electric utility is ideally using almost all of its capacity. But at night, a similar amount of power is available. And making that electricity available, whether it is used or not, costs the utility money.

Electric utilities that use peak-load pricing seek to encourage their consumers to shift the time of their electricity usage away from the heat of the day. Savvy industrial users that can shift to nighttime production might see big cost savings, but the average residential user isn't likely to turn off the air conditioner when it gets hot. Resources are better spent on additional insulation and other energy saving technologies than on additional power plants.

If the electric company can avoid building a new power plant, then all of its customers are likely to see a big price break. Yet in practice, peak-load pricing has come to be associated mostly with higher electric rates just when you most want to run the power.

Peak-load pricing has been embraced in other areas that electric power generation. Congestion pricing of the sort that has been imposed in London and proposed for New York City follows similar logic. Just think of it this way: If Mayor Bloomberg loves peak-load pricing, shouldn't you?

Congestion Pricing Unpopular in NY

Newsday reports that small business groups are unhappy with Mayor Bloomberg's proposal to help the environment and increase the speed of transportation in New York by reducing congestion through "congestion pricing". Small business groups correctly view congestion pricing as a new tax on something that has always been free before. Ignoring for a moment the distributional effects on the poor who will effectively priced out of driving between 86th Street and downtown, congestion pricing is obviously capable of doing exactly what it was designed to do: reduce traffic.

The problem with most schemes for charging for road access is that new infrastructure needs to be built to differentiate between paying costumers and everyone else. Bloomberg apparently plans to avoid this hassle by using pre-existing infrastructure that already charges for bridge access.

Savvy investors should be on the lookout to buy a piece of infrastructure investments like toll roads. While the political nature of the situation in Manhattan makes it unlikely that a private company could buy all the public roads in Manhattan, the potential revenue stream looks unbelievably inviting.

Cities like London have already demonstrated that congestion pricing works to reduce traffic by forcing people to pay for a public good. And the people who are willing to pay more than $10 every day just to drive downtown are likely willing to pay $15 or even $20 in just a few years. Hedge funds and universities with large endowments like Harvard are the main players in infrastructure investments today, but if more cities follow New York's lead here in the United States, the market could really take off.