Bill Averaging Programs and Consumer Behavior: Theory and Evidence

This paper examines consumer behavior under "bill smoothing," a common pricing program for utility customers where monthly payments are equalized over a one year cycle.First, we offer a theoretical model and conclude that bill smoothing is beneficial to consumers, but leads to exaggerated swings in usage over the yearly cycle. Second, we provide statistical evidence on the determinants of voluntary participation in bill smoothing programs by consumers; financial distress and high usage are less important than generally supposed. Finally, empirical tests of our theoretical model find that (i) participation increases overall consumption; and (ii) bill smoothing leads to exaggerated usage peaks and troughs, a result that could have implications for load management programs and general energy conservation.