Designing Pareto-superior demand-response rate options

We explore three voluntary service options-real-time pricing, time-of-use pricing, and curtailable/interruptible service-that a local distribution company might offer its customers in order to encourage them to alter their electricity usage in response to changes in the electricity-spot-market price. These options are simple and practical, and make minimal information demands. We show that each of the options is Pareto-superior ex ante, in that it benefits both the participants and the company offering it, while not affecting the non-participants. The options are shown to be Pareto-superior ex post as well, except under certain exceptional circumstances. (C) 2005 Elsevier Ltd. All rights reserved.