Characteristics of Consumer-Preferred Labeling Policies: Experimental Evidence from Price and Environmental Disclosure for Deregulated Electricity Services

This study gauges how different information disclosure policies impact consumer understanding, performance, and satisfaction during the choice of a deregulated electricity supplier, and it explores how the market share of each firm responds to different policies in a hypothetical market. Compulsory disclosure of detailed price and environmental attribute information yields high consumer satisfaction and minimizes most types of information processing errors. The implications for disclosure policy and firm-level market share are discussed. Spurred by the Energy Policy Act of 1992, the deregulation of the U.S. electricity supply is happening quickly. Already millions of retail customers and small businesses in the U.S. have the opportunity to choose among competing electricity suppliers. Competition promises many advantages. Some policymakers and legislators have touted the potential for lower prices, and, indeed, a well-operating, competitive market can allow motivated consumers who carefully compare competing offers to enforce pricing discipline on a market. Another potential benefit is that competition may increase the amount of electricity produced in an environmentally preferred manner. Environmentalists have worked hard at both the federal and state levels to include the disclosure of an electricity supplier's environmental characteristics in marketing and billing materials. These groups hope that such disclosure will turn consumer demand toward firms that cause fewer negative impacts on the environment and, in the long run, tip the balan ce of generation sources toward less environmentally damaging fuels. Given a willingness to pay for such attributes by consumers, a competitive market system may deliver on such a promise. All the benefits of consumer choice in this emergent market, however, are predicated upon adequate information to facilitate the decision-making process. Realizing the crucial role of information, several states have regulated the method of communicating price and environmental information in deregulated residential electricity markets while other state and federal authorities are exploring such regulation. For example, Illinois firms must insert quarterly updates of their purchased fuel mix and projected air emissions in customer billings and post these updates on the Internet (Illinois Commerce Commission) while California firms must display a standard fuel mix disclosure in all direct mail and Internet advertising (Senate Bill 1305, California Statutes of 1997). Several resolutions concerning standardized price disclosure have been issued by groups as diverse as the New England Governors' Conference, the National Association of Regulatory Utility Commissioners and the Clinton Administration (for wording o f these resolutions, see National Council on Competition and the Electricity Industry 1999). The ongoing debate concerning information disclosure in the deregulated residential electricity market contains themes similar to the debates that have arisen surrounding health and environmental claims in product labeling and advertising (Ippolito and Mathios 1990; Ford, Hastak, Mitra, and Ringold 1996; Maronick and Andrews 1999; Mitra, Hastak, Ford, and Ringold 1999; Newell, Goldsmith, and Banzhaf 1998). At one end of the potential spectrum in this debate is the view that any type of data disclosure should be completely voluntary. For example, even if a firm claims that its electricity service is environmentally friendly it need not disclose any data to support such a claim unless challenged under Federal Trade Commission (FTC) regulations for substantiation of claims. At the other end of the spectrum is the view that all firms should be required to reveal standardized information on all attributes deemed important by a majority of consumers. In the case of electricity, this might translate to a mandatory display of standardized information on price and environmental data in line with the recommendations of the National Council on Competition and the Electric Industry (April 1999). …