Peak Load Pricing and Reliability - Contributions to Theory and Method

Description

The present work seeks to contribute modestly to peak load pricing and reliability analysis, in both theory and application. The peak load pricing theory was once a fertile field for analytical exercises with The Bell Journal of Economics being its major breeding centre. The general result from the traditional theory of peak load pricing charged the off peak consumers marginal operating costs only and the on-peak users marginal operating plus marginal capacity costs, since it is the on-peakers who were assumed to press against capacity. The theoretical refinements have since somehow ceased to attract attention, possibly because the classical framework and the inevitable result have been taken for granted, and the research interest has shifted from theory to empirics. However, the distinction has haunted me and I have sought to take issue with the classical conclusion with the result that I have revisited the model and shown that if the off-peak period output is explicitly expressed in terms of capacity utilization of that period, the result will be an offpeak price including a fraction of the capacity cost in proportion to its significance relative to total utilization. An important property of our pricing model is that it easily lends itself to generalization in practical application.