Efficient Electricity Pricing with Self-Rationing

Chi-Keung Woo

Journal of Regulatory Economics, 1990, vol. 2, issue 1, 69-81

Abstract: Random rationing of generation capacity is inefficient because of the externality caused by an unpriced shortage. We eliminate the inefficiency by introducing a market for capacity via a self-rationing scheme that reflects a consumer's willingness-to-pay for electricity service. This scheme defines the notion of service reliability. The authors derive the optimal pricing and capacity planning rules under asymmetric information and demand uncertainty. The major findings are: (1) marginal cost pricing is ex ante efficient; (2) an electric utility's installed capacity should equal the total subscription for capacity; (3) the electric utility breaks even with certainty; and (4) partial service curtailment is ex post efficient if consumer preference is weakly separable. Copyright 1990 by Kluwer Academic Publishers

Date: 1990
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