Load management programs, cross-subsidies and transaction costs: the case of self-rationing

Load management programs are used by electric utilities to decrease peak consumption. Although they are generally offered simultaneously with regular service, economic models of their allocative efficiency are based on the implicit assumption that they are the only service available. We present a model in which participation to a particular load management program, called self-rationing, is optional. We show that, under a break-even constraint, welfare-maximizing prices involve a subsidy from the self-rationing program to regular service whenever peak demand is less elastic than base demand. If cross-subsidization is precluded, regular service is viable only if there exist transaction costs to participate in the self-rationing program.