Peak Load Pricing

Peak-load pricing¹ is another pricing variation where the operator and government interests coincide. Peak-load pricing is useful when marginal costs vary depending on when the service is used. For example, the telecommunications operator builds his network with the capacity to serve the peak demand, which generally occurs during business hours. As a result, network costs are caused by peak demand and not demand during off-peak hours. To facilitate marginal cost pricing, the operator would maximize profit by charging higher prices during peak hours and lower prices during off-peak hours. The prices at the peak reflect the marginal costs of capacity and the lower-off peak prices reflect only the marginal costs of off-peak usage, which are generally close to zero in telecommunications. Peak-load pricing requires sophisticated measurement of customer usage. This is rarely a problem in telecommunications, but requires advanced metering technologies in energy and water. As a result, the cost of implementing these advanced measurement technologies must be weighed against the welfare gains of metering. This is a situation where the operator and government may disagree. The operator benefits from advanced metering only to the extent that the metering increases profits. The government is also interested in how the metering benefits customers, so the government may have a stronger desire for advanced metering than does the operator.

Footnotes

1. See the reference section for Principles, Options, and Considerations in Rate Design and the reference section for Economics of Alternative Price Structures.