Utilities and their regulators view a different world than the one their customers perceive. In the world seen by most electricity customers, electricity costs the same amount regardless of how much is used or when. In contrast, utilities and their regulators see a world where electricity costs vary by the hour, infrastructure investments loom, and new or upcoming legislation requires reductions in electricity consumption or carbon emissions. “Efficiency-inducing rates (EIRs)”—defined here as rates that vary by time, condition, or customer behavior in order to induce efficient electricity consumption—bridge this perception gap. By aligning rates with electricity costs, they encourage customers to use electricity when it is least costly and lower their overall consumption.

This report seeks to empower regulators to evaluate and propose EIRs or effectively scrutinize utility proposals. It examines EIR options including inclining block rates, seasonal rates, time-of-use rates, critical peak pricing programs, and real-time pricing. On October 27, 2009 the federal government provided $3.4 billion of grants to 100 “smart grid” projects. Most smart grid projects include deployment of advanced meters, which facilitate certain EIRs. Regulators should evaluate rate options to maximize smart grid benefits. 

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