A recent study co-authored by an Illinois State University professor of economics shows how utility rate changes have a bigger impact on lower income households than wealthier ones.
Adrienne Ohler said one of the key differences between high and low-income houses is the amount of appliances. For example, high-income houses have more, including multiple (and larger) televisions, and often a second refrigerator. But unlike low-income houses, higher-income homes tend to use natural gas more for space heaters and water heaters, which helps keep the electricity bill down.
“We know high-income households can withstand a price increase and they will adapt and change their behavior. It’s sometimes harder for low-income households who very much rely on electricity for cooking and heating their houses,” said Ohler.
Ohler said lower-income homes are also less likely to have air-conditioning, or dryers. The latter surprised her a bit.
“And that’s another way they compensate. They do laundry less often,” said Ohler, who said since lower-income households are less likely to have air-conditioning units, they also can’t compensate for higher rates by using less air conditioning.
Ohler said one of the main takeaways from the study she co-authored with Illinois State alum Yewande Marquis was an attempt to steer economists away from focusing on elasticity issues. She said economists tend to fall that way because elasticity is a measure of how responsive households are in terms of a percentage change, which she said is not a fair way to compare high and low-incomes houses.
“Low-income houses start with less electricity use, so if they’re only using, say, 1,000 kilowatt hours per month, a 10 percent reduction is only going to be 100 kilowatt hours. But for a high-income household that’s using 2,000 kilowatt hours, a 10 percent reduction is going to lead to much more electricity use,” said Ohler.
That means the same percentage decrease in usage doesn’t lead to the same amount of actual electricity reduction.
Ohler also works closely with the Illinois Commerce Commission in her role as the director of outreach for the Institute for Regulatory Policy Studies at Illinois State University. In that role, she helps organize a biannual conference with state regulators and utilities to discuss impacts of changing prices.
ICC members are appointed by the governor and need to no special expertise to serve. Ohler said though appointees may not be familiar with how electricity markets work, they are very curious how price changes affect low-income households. She said rate0change studies tend to focus on price elasticity—and how the average household responds to electricity rate increases.
“One of the purposes of that conference is to educate them on what it is the laws say they can do, and what is happening in the industry right now,” said Ohler. “Where the study comes in is that we can point to this study and say, ‘If you’re concerned about low-income households, this is what the appliance stock looks like for those low-income households.”
Ohler surmised a fair amount of ICC members are concerned about how rate changes affect low-income households, which will factor into their decision-making as regulators.
“In some of the demand charges and pricing systems that have been proposed in the past, they were concerned enough about low-income households that they did not vote in favor of a rate increase or a change in that rate structure,” said Ohler.
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