The author is Associate Professor of Economics at the University of North Carolina at Greensboro, Greensboro, NC 27412. Earlier versions of this paper were presented at the Triangle Area Economic History Workshop and the Rutgers University Advanced Workshop on Regulatory Economics. I am indebted to the participants in those workshops and to others including William Hausman, Barry Hirsch, David Kemme, Albert Link, Wilson Mixon, Kenneth Snowden, and anonymous referees. I gratefully acknowledge the support of the UNCG Research Council.Google Scholar

¹ Neil, Charles E., “Entering the Seventh Decade of Electric Power,” Edison Electric Institute (1912), unpaged. Material discussed here appears on the 12th page.Google Scholar

² As the electrification of industry increased, more energy was purchased from utilities. The enormous impact of electrification on American industry has been shown by Devine, Warren D., “From Shafts to Wires: Historical Perspective on Electrification,” this JOURNAL, 43 (06 1983), pp. 347–72;Google ScholarDuBoff, Richard B., “The Introduction of Electric Power in American Manufacturing,” Economic History Review, 2nd ser., 20 (12 1967), pp. 509–18;Google Scholar and Woolf, Arthur G., “Electricity, Productivity, and Labor Saving in American Manufacturing, 1900–1929,” Exploration in Economic History, 21 (04 1984), pp. 176–91.CrossRefGoogle Scholar

³ The first publication by an American economist in this tradition probably was Clark, J. M., “Rates for Public Utilities,” American Economic Review, 1 (09 1911), pp. 473–87.Google Scholar The usually cited seminal works in the modern literature include Boiteux, M., “La Tarification des Demands en Point: Application de la Theorie de la Vente au Cout Marginal,” Revue Generale de l' Electricite, 58 (08 1949), pp. 321–40,Google Scholar translated as “Peak-Load Pricing” in Journal of Business, 33 (04 1960), pp. 157–79;Google Scholar and Steiner, P., “Peak Loads and Efficient Pricing,” Quarterly Journal of Economics, 71 (11 1957), pp. 585–610.CrossRefGoogle Scholar Econometricians have recently become involved with estimating the benefits from time-of-day rates. See Aigner, Dennis J., “The Welfare Econometrics of Peak-Load Pricing for Electricity,” Journal of Econometrics: Annals 1984–1983, 26 (09/10 1984), pp. 1–15.CrossRefGoogle Scholar

⁴ Energy has a time dimension and is now commonly measured in kilowatt-hours. Power has no time dimension and is measured in kilowatts. One kilowatt-hour of energy can be consumed by using one kilowatt of power for one hour or by using two kilowatts of power for one-half hour. “Demand” is (and was) usually measured not as the maximum instantaneous power used but as the maximum average power used in any 15-minute (or other short time) period. The specific way in which “demand” is charged usually falls into one of two categories: Hopkinson rates and Wright rates. A Hopkinson rate contains an explicit demand charge, for example: demand charge = $2.50 per month per kilowatt of the maximum demand in the month, plus an energy charge of 5 cents per kilowatt-hour used in the month. A Wright rate achieves the same objective through the use of a declining block structure with the size of the high-priced block a function of “demand”: 10 cents per kilowatt-hour for electricity used equivalent to or less than 50 hours use per month of the maximum demand; 5 cents per kilowatt-hour for electricity used in excess of the equivalent of 50 hours use per month of the maximum demand. Consider an electricity user whose maximum power consumption in one month is 1 kw and whose energy consumption is 300 kwh. Under a Hopkinson rate, the bill would be calculated as: 1 kw x $2.50 per month (= $2.50) + 300 kwh x $0.05 per kwh (= $15.00) = a total charge of $17.50. Under a Wright rate the calculation would be: (1 kw demand × 50 hours) × $0.10 (= $5.00) + (300 kwh - 50 figured above) × $0.05 (= $12.50) = a total charge of $17.50. Given any Hopkinson rate structure, one can always develop a Wright rate structure which will produce identical bills except in the case of an electricity user whose consumption of energy is so low relative to his maximum power usage that it remains wholly in the initial high-priced block. Actual rate structures sometimes combine features of Hopkinson and Wright rate structures and frequently add other complicating features, such as block pricing. The term “demand-charge rate structure” will be used to refer to any rate structure in which a user's bill is partially a function of his maximum power consumption independent of the time in which the maximum power consumption occurred. The term “demand charge” will be used either interchangeably with “demand-charge rate structure,” or, more specifically, to refer to the component of an electricity user's bill which is determined by maximum power consumption. The term “demand” especially in quoted material, will often refer to the engineering concept of maximum power consumption rather than the usual economic concept. The meaning should be clear from the context.Google Scholar

⁵ See, for example Kahn, Alfred E., The Economics of Regulation (New York, 1970), vol. 1, pp. 95–96;Google ScholarDavidson, Ralph K., Price Discrimination in Selling Gas and Electricity (Baltimore, 1954), pp. 85–86;Google Scholar and Lewis, W. Arthur, “The Two-Part Tariff,” Economica, 8 (08 1941), p. 252.Google Scholar

⁶ For more on these early discussions see Hausman, W. J. and Neufeld, J. L., “Time-of-Day Pricing in the U.S. Electric Power Industry at the Turn of the Century,” Rand Journal of Economics, 15 (Spring 1984), pp. 116–26;CrossRefGoogle ScholarNeufeld, John L., “The Origin of Electricity Rate Structures—1882 to 1905” (unpublished manuscript, University of North Carolina at Greensboro, 1985).Google Scholar

⁷ Hopkinson, John, “The Cost of Electric Supply,” Transactions of the Junior Engineering Society, 3 (1892–1893), pp. 33–46.Google Scholar

⁸ In 1897 and 1898 the Commissioner of Labor surveyed electric power companies and received responses from about 31 percent, responsible for 45 percent of the value of all electricity generation. Of those reporting income by type of service (93 percent of respondents), arc lighting accounted for 39 percent of total income and incandescent lighting accounted for 49 percent. A relatively small number of large stations were responsible for much of the non-lighting income. Lighting was the source of over 90 percent of total income for 75 percent of respondents. Fourteenth Annual Report of the Commissioner of Labor 1899, House of Representatives, 56th Cong., Document No. 713 (Washington, D.C., 1900).Google Scholar

⁹ Crew, Michael A. and Kleindorfer, Paul R., The Economics of Public Utility Regulation (Cambridge, Mass., 1986), pp. 185–93.CrossRefGoogle Scholar

¹⁰ Wright, Arthur, “Cost of Electricity Supply,” Municipal Electrical Association Proceedings (London, 1896), pp. 44–67;Google Scholar and Wright, Arthur, “Profitable Extensions of Electricity Supply Stations,” Proceedings of the National Electric Light Association, Twentieth Convention (New York, 1897), pp. 159–89.Google Scholar

¹¹ Insull mentioned his financial involvement in the Wright patents in a discussion over the relative merits of demand-charge and time-of-day rate structures, Minutes of the Fourteenth Annual Meeting (19th Convention) of the Association of Edison Illuminating Companies (Sault Sainte Marie, Michigan, 1898), p. 133.Google Scholar

¹² Eisenmenger, H. E., Central Station Rates in Theory and Practice (Chicago, 1921), p. 262.Google Scholar

¹³ The first commission was established in Massachusetts in 1887. The next commissions were not established until 1907. By 1915, 33 states had established such commissions with 21 established during the period 1911–1913. Stigler, George J. and Friedland, Claire, “What Can Regulators Regulate? The Case of Electricity,” Journal of Law and Economics, 5 (10 1962), p. 13.CrossRefGoogle Scholar

¹⁴ Lewis, “The Two-Part Tariff”Google ScholarByatt, I. C. R., “The Genesis of the Present Pricing System in Electricity Supply,” Oxford Economic Papers, 15 (1963), pp. 8–18.CrossRefGoogle Scholar

¹⁵ A table showing maximum available generator size by year is given by Neil, “Entering the Seventh Decade,” 5th page. During the period 1879 to 1903 the annual growth rate in maximum generator size was 24.6 percent. From 1904 to 1929 the growth rate was 11.2 percent.Google Scholar

¹⁶ The classic review of Ramsey pricing can be found in Baumol, William J. and Bradford, David, “Optimal Departures from Marginal Cost Pricing,” American Economic Review, 60 (06 1970), pp. 265–83.Google Scholar

¹⁷ Neil, “Entering the Seventh Decade,” 2nd page.Google Scholar

¹⁸ Passer, Harold C., The Electrical Manufacturers 1875–1900 (Cambridge, Mass., 1953), pp. 117–21.CrossRefGoogle Scholar

¹⁹ U.S. Bureau of the Census, Special Reports, Central Electric Light and Power-Stations 1902 (Washington, D.C., 1905), p. 3.Google Scholar

²⁰ Two of many are: Hale, R. S., “Isolated Plant vs. Central Stations Supply of Electricity: A Suggestion for Obtaining Estimates of Costs on a Competitive Basis,” Electrical World and Engineer, 42 (09 5, 1903), pp. 383–84;Google ScholarKnowlton, H. S., “The Central Station and the Isolated Plant,” Cassier's Magazine, 32 (08 1907), pp. 359–63.Google Scholar

²¹ “Electrical Plant in the Newark Free Public Library,” Electrical World and Engineer, 42 (08 15, 1903), pp. 271–72.Google Scholar

²² Main, Charles T., “Central Stations versus Isolated Plants for Textile Mills,” pp. 205–17; and R. S. Hale, “The Supply of Electrical Power for Industrial Establishments from Central Stations,”, pp. 219–27; also discussion, pp. 977–1009, all from Proceedings of the Joint Meeting of the American Institute of Electrical Engineers and the American Society of Mechanical Engineers (Feb. 16, 1910).Google Scholar

²³ Doherty, Henry L., “Equitable, Uniform, and Competitive Rates,” Proceedings of the National Electric Light Association, Twenty-third Convention (New York, 1900), p. 305.Google Scholar

²⁴ “Principles of Rate-Making,” an editorial, Electrical World, 57 (04 9, 1911), p. 971.Google Scholar

²⁵ “Central-Station Rates Discussed at Boston,” Electrical World, 57 (03 9, 1911), p. 604;Google ScholarWinslow, William H., “Rate Making for Central Stations,” Electrical World, 63 (01 3, 1914), pp. 12–13.Google Scholar

²⁶ Brandeis, Louis D., “Central Station Rates, Legal Opinion of Louis D. Brandeis,” abstracted and quoted in Rate Research, 4 (10, 15, 1913), pp. 35–38, and (10 22, 1913), pp. 51–54.Google Scholar

²⁷ These letters appeared in the letters to the editor section of Electrical World from October 25, 1913 to 07 31, 1915.Google Scholar

²⁸ Proceedings of the National Electric Light Association, Thirty-Fourth Convention (New York, 1911), p. 290.Google Scholar

²⁹ “Report of the Rate Research Committee,” Proceedings of the National Electric Light Association, Thirty-Fifth Convention (New York, 1912), pp. 184–229.Google Scholar

³⁰ These discussions paralleled to a remarkable extent earlier discussions on rate structures within the railway industry, although surprisingly little reference was made to the case of railways by those in the electric power industry. Locklin, D. Phillip, “The Literature on Railway Rate Theory,” Quarterly Journal of Economics, 47 (02 1933), pp. 167–230.CrossRefGoogle Scholar

³¹ “Report of the Rate Research Committee and Discussion,” Proceedings of the National Electric Light Association, Thirty-Seventh Convention (New York, 1914), pp. 59–116.Google Scholar

³² Locklin, D. Phillip, “The Literature on Railway Rate Theory,” Quarterly Journal of Economics, 47 (02 1933), pp. 63, 70.CrossRefGoogle Scholar

³³ Locklin, D. Phillip, “The Literature on Railway Rate Theory,” Quarterly Journal of Economics, 47 (02 1933), p. 88.CrossRefGoogle Scholar

³⁴ Locklin, D. Phillip, “The Literature on Railway Rate Theory,” Quarterly Journal of Economics, pp. 86–87.Google Scholar

³⁵ Nash, L. R., Public Utility Rate Structures (New York, 1933), p. 321.Google Scholar

³⁶ “Electric Rates—Massachusetts,” Rate Research, 2 (10 23, 1912), pp. 52–53.Google Scholar

³⁷ Lieb, J. W. Jr, “Methods of Charging for Current,” Minutes of the Thirteenth Meeting of the Association of Edison Illuminating Companies (Niagara Falls, 1897), pp. 59–79.Google Scholar

³⁸ Locklin, D. Phillip, “The Literature on Railway Rate Theory,” Quarterly Journal of Economics, p. 68.Google Scholar

³⁹ The National Electric Light Association's Report of Rates for Commercial Lighting and Power Service (New York, 1906).Google Scholar

⁴⁰ Generally the term sliding scale indicated that discounts on energy costs were given those with larger consumption, as would be the case under a declining block rate schedule. Presumably this term might also have been used for a “Wright” demand-charge rate structure, or a similar rate structure. See fn. 4 for an explanation of the Wright rate structure.Google Scholar

⁴¹ Rate Research Committee, NELA Rate Book and Supplement (Chicago, 1917).Google Scholar