MINIMAL ADJUSTMENT COSTS AND THE OPTIMAL CHOICE OF INPUTS UNDER TIME-OF-USE ELECTRICITY RATES

In Time-of-Use (TOU) pricing schemes, utilities charge rates that depe nd on the time of day and the season of the year at which electricity is used. Estimates of the effects of TOU rates on business customers i n the U.S. and Israel demonstrate that most firms do not appear to res pond at all to newly introduced TOU rates, but those that do respond m ake substantial adjustments. In this paper we show that adjustment cos ts associated with changing the level of employment can explain the ob served pattern of behavior in the U.S. and Israel. We apply our model to large industrial firms in Israel and show that it predicts their ac tual responses to TOU rates quite well.