Willingness to pay for residential electricity supply quality and reliability

Abstract

A key feature of many regulatory reviews is determination of the amount of expenditure that should be reflected in the revenue requirement for a service provider. An increasingly important driver in determining the appropriate level of this expenditure is the desired level of service quality and requisite service targets which are incorporated in the ‘regulatory bargain’. Willingness to pay (WTP) evidence can be used in the regulatory bargain to establish such targets. In this paper we study households’ WTP to avoid specific restrictions on service supply quality (especially reliability) in residential electricity, using stated choice experiments to reveal the set of preferences required to calculate WTP. Using a sample of residents in Canberra, Australia, we find that residential customers value reliability of the electricity service; in particular, frequency and the duration of outages are important to customers, and customers value incurring fewer and shorter outages, compared to more frequent and longer outages. The average WTP to avoid a common set of events such as outages, power surges and flickers in electric current vary from $60 per customer per event for an 8-h electricity outage when it occurs once a year through to $9 per event for a flicker in electric current.