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 depend 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 in the U.S. and Israel demonstrate that most firms do not appear to respond at all to newly introduced TOU rates, but those that do respond make substantial adjustments. In this paper we show that adjustment costs associated with changing the level of employment can explain the observed 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 actual responses to TOU rates quite well.