Title: Contract Choice and Commitment Concessions: Evidence from Individual-Level Electricity Consumption and Payments
Abstract
Electricity bills are rising faster than inflation, making a household’s electricity contract an increasingly consequential decision. Deregulated retail markets generally offer a choice between fixed rate contracts (FixRCs) and variable rate contracts (VarRCs), yet their financial impact is obscured by non-linear pricing, price volatility, and consumers’ self-selection based on their latent characteristics. To improve transparency of rates, utilities post representative rates corresponding to a few consumption levels in Electricity Facts Labels (EFLs). Methodology/results: In collaboration with one of the largest U.S. utilities, we estimate the causal effect of contract choice on realized rates for more than 77,000 households recorded over a full year, linking each household’s rate to its contract, tenure, monthly and hourly consumption, and zip-level demographics. We find that rates tend to increase with consumption variability. We address self-selection by instrumenting contract choice with lagged Google search intensity for the state’s electricity-shopping platform in Two-Stage Least Squares and Double Machine Learning (DML) frameworks, controlling for the full consumption profile. FixRCs reduce rates by approximately 4¢/kWh, roughly one fifth of the average rate; the largest savings accrue to high-income households whose consumption concentrates in winter months, the signature of electric heating. Managerial implications: The FixRC discount (commitment concession) is substantial on average. Utilities can adjust the commitment concession to achieve a specific mix of FixRC and VarRC consumers. Moreover, they can reveal this concession to attract FixRC consumers, especially those using electric heating. We make two concrete process recommendations to utilities: i) enhanced EFLs with quotes based on consumption level and variability, and ii) a break-even service length informing consumers about the contract length beyond which FixRCs become cheaper than VarRCs. Enhanced EFLs and break-even service length increase transparency and in turn can help lower-income households raise their savings closer to those of higher-income households, making the market fairer.
Bio
Dr. Fariba Mamaghani is an Assistant Professor of Management Science at the A. B. Freeman School of Business at Tulane University and a member of the Tulane Energy Institute Advisory Board. Her research examines how data centers and the rapid growth of AI are reshaping electricity demand and prices, along with how households choose electricity contracts and how utilities should price and invest to stay affordable. Her work has been published in Operations Research, and several of her recent papers are under review at top journals in operations and management science. She recently received two Tulane research grants, a Data and AI Research Grant and a Committee on Research (COR) grant. She works closely with leading energy companies, and her approach combines optimization, game theory, and machine learning. She has presented at London Business School, Harvard, and UC Irvine, and her research has been featured in news media. She is the elected Cluster Chair of the INFORMS ENRE Environment and Sustainability Cluster and Vice President of Outreach and Awards for the POMS College of Sustainability. She teaches Business Statistics to MBA, Professional MBA, and Master of Management in Energy students. She joined Freeman’s tenure-track faculty in 2023 after two years as a visiting assistant professor, and holds a PhD from the University of Texas at Dallas, as well as a BS and MS in industrial engineering from Sharif University of Technology.