Optimal Non-linear Tariffs, Price-Cap and Territorial Uniformity

Alessandro Petretto ()

Rivista italiana degli economisti, 1997, issue 1, 3-22

Abstract: In many European countries the electricity sector regulation imposes the constraint of the uniform tariff for all the national territory, independently from the territorial distribution of the costs of supplying the service. In this paper the effects of uniformity constraints are theoretically ascertained in the case of non-linear tariffs when (1) these are optimally chosen, i.e. according to a welfare function maximization, and when (2) these are set by a CAP regulation, i.e. by a profit maximization subject to an Average Revenue Constraint (ARC regulation). In both cases we are not always able to directly compare actual consumption levels in the situation with uniformity constraints with respect to those without uniformity because the framework changes completely. Therefore, we apply the usual "First order conditions method" of comparison, i.e. the comparison of the first order conditions of the Second Best context with uniformity constraints and imperfect information of firms about consumer preferences and those prevailing, on one hand, in the First Best context and, on the other, in the same Second Best situation but without costs differentiation in national territory. By analogy we proceed in the case of ARC regulation.

Date: 1997
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