Macroeconomic Risk and Residential Rate Design

26 Pages Posted: 20 Apr 2015 Last revised: 13 Oct 2016

See all articles by Marc H. Vatter

Marc H. Vatter

Marc H. Vatter, Ph.D.; Elevation Direct; Economic Insight, Inc.; Brown University Dept. of Economics

Frederick Barney

Independent

Date Written: April 19, 2015

Abstract

If financial markets manage risk to personal consumption efficiently, it should be the case that energy bills that vary directly with aggregate personal consumption can be made both lower and less volatile at cost, since doing so is effectively making payments when aggregate consumption is high, and receiving payments when it is low. However, if energy bills vary directly with household personal consumption, making them less volatile will make household consumption more volatile. We develop a rate design that optimizes household consumption when there are macroeconomic surprises, as well as those in energy price and load. Households are heterogeneous in personal consumption, and that of energy. The rate design is embedded in a model of an economy-wide market for management of risk. Customers pay positive or negative risk premia that increase in the sensitivity of their consumption to macroeconomic surprises, and in the correlations of their loads with spot prices. Risk premia also increase in systematic risk and economy-wide risk aversion.

Keywords: utility; consumption; risk; energy; fixed; flat; bill

JEL Classification: D11; D81; K23; L51; L97; Q40

Suggested Citation

Vatter, Marc H. and Barney, Frederick, Macroeconomic Risk and Residential Rate Design (April 19, 2015). USAEE Working Paper No. 15-208. Available at SSRN: https://ssrn.com/abstract=2596258 or http://dx.doi.org/10.2139/ssrn.2596258

Marc H. Vatter (Contact Author)

Marc H. Vatter, Ph.D. ( email )

9 Underhill Street
Nashua, NH 03060-4060
United States
603.402.3433 (Phone)

HOME PAGE: http://appliedecon.net

Elevation Direct ( email )

3753 Howard Hughes Pkwy
Las Vegas, NV 89169
United States
208-946-9814 (Phone)

HOME PAGE: http://www.elevationdirect.com/

Economic Insight, Inc. ( email )

9 Underhill Street
Nashua, NH 03060-4060
United States
603.402.3433 (Phone)

HOME PAGE: http://appliedecon.net

Brown University Dept. of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-3836 (Phone)

HOME PAGE: http://www.brown.edu/Departments/Economics/

Frederick Barney

Independent

No Address Available

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