Electricity rationing through a two-stage mechanism

Analysis of interruptible service mechanisms has focused on the efficiency losses due to the absence of complete contingent contracts. There exists a second type of inefficiency which, to a large extent, has been ignored. It originates from the fact that the relative order, or ranking, of consumers' willingness to pay for a given quantity generally varies throughout the contract period. A more general model of electricity demand allowing for changes in the order of consumer willingness to pay for a given quantity is presented. Under such demand conditions, the use of a two-stage rationing mechanism is proposed. Rationing plans which maximize expected aggregate surplus are established in the first stage. The second stage consists in a market for allocation rights to be operated once the states of nature are revealed. Allocations under this two-stage mechanism are shown to be Pareto-superior to existing rationing plans. Directions for future research are discussed.