Electric companies typically have 5–10 different rate schedules for their main customer groups. The average price charge

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Electric companies typically have 5–10 different rate schedules
for their main customer groups. The average price charged to large
industrial users may differ substantially from that charged to
residences. Moreover, many con- sumers pay a price for electricity
based on the time of day they use it. For example, the prices
charged by Consolidated Edison, a large New York electric utility,
and Pacific Gas and Electric, a major California electric utility,
are as follows:
Price:
Company and time of day of electrical use (Cents per
kilowatt-hour)
Consolidated Edison
8am-10pm (Peak hours) 27
10pm-8am (off-peak hours) 4a
Pacific Gas and Electric
Summer
Noon-6pm (peak hours) 28.3
6pm-noon (off-peak hours) 9.2
Winter
Noon-6pm (peak hours) 11.3
6pm-noon (off-peak hours) 8.0
ore costly ones as demand goes up. Consequently, at 3 a.m., a
utility might meet its requirements from a hydroelectric dam that
produces electricity for $0.02 per kilowatt-hour. However, on a hot
day in August, when air condition- ers are running full blast,
demand would be so great that the utility would be forced to use
its most costly generators—perhaps an oil-fired plant where
electricity costs $0.07 per kilowatt-hour.
a. Does price discrimination occur in the
market for electricity?
b. Why have some state regulatory commissions,
including the Public Service Commission of New York, ordered that
time-of-day rates be phased in for residential consumers?
c. In many areas, both residential and
industrial consumers tend to pay a lower price per kilowatt-hour if
they use more rather than less electricity. Is this price
discrimination? If so, what kind of price discrimination is it?
d. Explain why price discrimination is used by
managers of electric companies.8