The hidden costs of tariff misclassification: Structural winners and losers

Abstract

We propose an empirical model to evaluate firms’ choices in electric tariff contracting. By combining novel data from the Non-residential Electricity Consumption Survey with utility billing data from the state-owned national utility provider, we analyze two pathological situations revealed by the electric bills of commercial and service SMEs in Aguascalientes, Mexico. First, despite being banned, many firms pay the residential tariff. Among these firms, some pay the regular subsidized rate, while others pay the high-demand rate, which is higher than the corresponding business rate. Additionally, for another group of companies, there are two competing business tariffs, many of which are misclassified and thus must be re-categorized to afford less expensive electric bills. A rich set of explanatory variables is used to quantify the two biases, explain the wrong decisions, estimate hidden costs and subsidies at the national level, and provide valuable policy implications.

Electricity pricing and tariff classifications significantly impact the operational costs and competitiveness of firms. Inaccurate tariff assignments can result in hidden costs and ineffective subsidies, affecting both companies and national energy budgets. This study is valuable as it empirically examines these issues within the Mexican context, uncovering biases and inefficiencies in tariff contracting that may hold broader implications for energy policy and pricing efficiency worldwide.