At The Knowledge Problem, economist Lynne Kiesling discusses the NYT article on variable-rate electricity pricing I highlighted Monday. As she sees it, there is a problem of asymmetric information.

In the case of electricity, retail customers do not see price changes until after those changes have taken effect, because under existing regulation they pay averaged rates and only receive information about the prices they face at the end of the month when they receive their bill. However, underlying costs of serving those customers can change hourly, so with customers paying averaged prices there is a mismatch between the prices they pay and the costs of serving them.

We could improve efficiency (and thus enable conservation and lower costs) if we had pricing that allowed for a better match of the price the customer pays with the cost, but unless the customer has some way of gaining information about prices in advance, but if we don't do that, then we have the aforementioned asymmetric information problem.

As Kiesling explains, the solution is not purely technological. Having gizmos that provide information about price changes is important, but so is rate reform.

The technology can't create all of these benefits on its own: rate redesign to allow dynamic pricing is imperative. What good is having technology to enable responsive demand if the meter just gets the same old, same old averaged price signal? Not much. Digital technology and dynamic pricing are symbiotic. Furthermore, the most significant benefits of digital technology and dynamic pricing are largely unseen by us in advance, which is why it's so bloody hard to get them enacted in regulation!

The most substantial benefits of the retail competition that technology + pricing enable come from product differentiation and innovation in the products and services available to customers. Think about telecom: we got some benefit from the reduction in prices for long-distance service, but the real value proposition has been in the proliferation of new products and services that have transformed our lives. There are entrepreneurs out there thinking about ways to do that in electric power retail service, and the potential exists, if we will but let it happen.

In other words, to truly take advantage of technological innovation and price information, there must be regulatory reforms that allow for retail electricity competition. The cost savings from time shifting would be only a portion of the resulting economic benefits.