Welfare study of lifeline electricity rates

Abstract

Increases in electricity prices have caused many states to consider adopting an increasing block rate "lifeline" structure. Proponents argue that a lifeline rate structure provides low income households with a basic amount of electricity at a reasonable price, and encourages all consumers to conserve electricity. This thesis developed a framework to analyze the welfare effects of adopting a lifeline rate structure for the state of Montana. The properties of a linear demand system, expenditure function, and compensated demand function are developed in detail. A method for calculating compensating variation from this demand system is applied to a utility model with a kinked budget constraint. Using this method it is determined that the proposed rate structure would not be beneficial to low income households of the state of Montana.