IDEAS home Printed from https://ideas.repec.org/p/rff/dpaper/dp-23-40.html
   My bibliography  Save this paper

The Persistence of Volumetric Pricing

Author

Listed:
  • Brennan, Tim

    (Resources for the Future)

Abstract

How to recover the costs of electricity distribution has become a prominent and controversial issue in the wake of California Public Utilities Commission proposals to reform compensation for solar electricity homeowners who sell into the grid, with subsequent proposals to recover more of the distribution costs through fixed charges based on household income. This debate raises questions about the ubiquity of volumetric pricing for fixed-cost recovery in regulated industries. Ideal cost recovery entails marginal cost pricing of kilowatt-hours delivered, per-user connections, and capacity needed to handle coincident peak use. Remaining uncovered costs of distribution should be recovered by fixed charges. Equity and efficiency considerations suggest assigning fixed charges on the basis of willingness to pay or income, although neither is perfect. Nevertheless, volumetric recovery of fixed costs has persisted for several reasons: mistaken analogies to competitive markets, simplicity, network effects, incumbent resistance, and fairness and rights. Getting pricing right matters not just for general efficiency but also to remove pricing barriers to decarbonization. For this reason, electricity regulators should consider recovering more fixed costs through fixed charges.

Suggested Citation

  • Brennan, Tim, 2023. "The Persistence of Volumetric Pricing," RFF Working Paper Series 23-40, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-23-40
    as

    Download full text from publisher

    File URL: https://www.rff.org/documents/4219/WP_23-40.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hunt Allcott & Cass R. Sunstein, 2015. "Counterpoint To Six Potential Arguments Against “Regulating Internalities”," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 34(3), pages 712-715, June.
    2. Brennan, Timothy J & Boyd, James, 1997. "Stranded Costs, Takings, and the Law and Economics of Implicit Constracts," Journal of Regulatory Economics, Springer, vol. 11(1), pages 41-54, January.
    3. Brian F. Mannix & Susan E. Dudley, 2015. "The Limits Of Irrationality As A Rationale For Regulation," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 34(3), pages 705-712, June.
    4. Timothy J. Brennan, 2004. "Market Failures in Real-Time Metering," Journal of Regulatory Economics, Springer, vol. 26(2), pages 119-139, September.
    5. Lee S. Friedman, 2009. "The long and the short of it: California's electricity crisis," International Journal of Public Policy, Inderscience Enterprises Ltd, vol. 4(1/2), pages 4-31.
    6. Hogan, William W, 1992. "Contract Networks for Electric Power Transmission," Journal of Regulatory Economics, Springer, vol. 4(3), pages 211-242, September.
    7. Michael Crew & Timothy J. Brennan (ed.), 2016. "The Future of the Postal Sector in a Digital World," Topics in Regulatory Economics and Policy, Springer, number 978-3-319-24454-9, March.
    8. Joskow, Paul L., 2008. "Capacity payments in imperfect electricity markets: Need and design," Utilities Policy, Elsevier, vol. 16(3), pages 159-170, September.
    9. Lott, John R, Jr & Roberts, Russell D, 1991. "A Guide to the Pitfalls of Identifying Price Discrimination," Economic Inquiry, Western Economic Association International, vol. 29(1), pages 14-23, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eicke, Anselm & Schittekatte, Tim, 2022. "Fighting the wrong battle? A critical assessment of arguments against nodal electricity prices in the European debate," Energy Policy, Elsevier, vol. 170(C).
    2. Liu, Shuangquan & Yang, Qiang & Cai, Huaxiang & Yan, Minghui & Zhang, Maolin & Wu, Dianning & Xie, Mengfei, 2019. "Market reform of Yunnan electricity in southwestern China: Practice, challenges and implications," Renewable and Sustainable Energy Reviews, Elsevier, vol. 113(C), pages 1-1.
    3. Christopher Decker, 2016. "Regulating networks in decline," Journal of Regulatory Economics, Springer, vol. 49(3), pages 344-370, June.
    4. Green, Richard, 2010. "Are the British electricity trading and transmission arrangements future-proof?," Utilities Policy, Elsevier, vol. 18(4), pages 186-194, December.
    5. Richard Green, Danny Pudjianto, Iain Staffell and Goran Strbac, 2016. "Market Design for Long-Distance Trade in Renewable Electricity," The Energy Journal, International Association for Energy Economics, vol. 0(Bollino-M).
    6. Timothy Brennan, 2010. "Decoupling in electric utilities," Journal of Regulatory Economics, Springer, vol. 38(1), pages 49-69, August.
    7. Simon P. Anderson & Régis Renault, 2011. "Price Discrimination," Chapters, in: André de Palma & Robin Lindsey & Emile Quinet & Roger Vickerman (ed.), A Handbook of Transport Economics, chapter 22, Edward Elgar Publishing.
    8. Benjamin F. Hobbs & Fieke A.M. Rijkers & Maroeska G. Boots, 2005. "The More Cooperation, The More Competition? A Cournot Analysis of the Benefits of Electric Market Coupling," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 69-98.
    9. Andor, Mark A. & Frondel, Manuel & Schmidt, Christoph M. & Simora, Michael & Sommer, Stephan, 2015. "Klima- und Energiepolitik in Deutschland: Dissens und Konsens," RWI Materialien 91, RWI - Leibniz-Institut für Wirtschaftsforschung.
    10. Karsten Neuhoff, 2002. "Optimal congestion treatment for bilateral electricity trading," Working Papers EP05, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    11. Keppler, Jan Horst & Quemin, Simon & Saguan, Marcelo, 2022. "Why the sustainable provision of low-carbon electricity needs hybrid markets," Energy Policy, Elsevier, vol. 171(C).
    12. Simshauser, Paul, 2024. "On static vs. dynamic line ratings in renewable energy zones," Energy Economics, Elsevier, vol. 129(C).
    13. Glachant, Jean-Michel & Pignon, Virginie, 2005. "Nordic congestion's arrangement as a model for Europe? Physical constraints vs. economic incentives," Utilities Policy, Elsevier, vol. 13(2), pages 153-162, June.
    14. Simshauser, P., 2019. "On the impact of government-initiated CfD’s in Australia’s National Electricity Market," Cambridge Working Papers in Economics 1901, Faculty of Economics, University of Cambridge.
    15. Zugang Liu & Anna Nagurney, 2009. "An integrated electric power supply chain and fuel market network framework: Theoretical modeling with empirical analysis for New England," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(7), pages 600-624, October.
    16. Blázquez de Paz, Mario, 2018. "Electricity auctions in the presence of transmission constraints and transmission costs," Energy Economics, Elsevier, vol. 74(C), pages 605-627.
    17. Glanchant, J-M. & Pignon, V., 2003. "Nordic Electricity Congestion's Arrangement as a Model for Europe: Physical Constraints or Operators' Opportunity," Cambridge Working Papers in Economics 0313, Faculty of Economics, University of Cambridge.
    18. Zhang, Ning, 2009. "Market performance and bidders' bidding behavior in the New York Transmission Congestion Contract market," Energy Economics, Elsevier, vol. 31(1), pages 61-68, January.
    19. Ibrahim Mohammed & Basak Denizci Guillet & Rob Law & Wassiuw Abdul Rahaman, 2021. "Predicting the direction of dynamic price adjustment in the Hong Kong hotel industry," Tourism Economics, , vol. 27(2), pages 346-364, March.
    20. Richard O’Neill & Emily Fisher & Benjamin Hobbs & Ross Baldick, 2008. "Towards a complete real-time electricity market design," Journal of Regulatory Economics, Springer, vol. 34(3), pages 220-250, December.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rff:dpaper:dp-23-40. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Resources for the Future (email available below). General contact details of provider: https://edirc.repec.org/data/rffffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.