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Peak Load Pricing in the Electric Utility Industry


  • John T. Wenders


In the electric utility industry cost minimization requires that heterogeneous electric generation technologies be used to produce electricity demands of different durations. In contrast to the conclusions of traditional peak-load pricing theory, the existence of a heterogeneous capital stock means that off-peak marginal cost prices almost always should include some marginal capacity costs, and that the profit maximizing regulated electric utility may set peak price above marginal cost and off-peak price below marginal cost in order to encourage the expansion of capital-intensive base load generating capacity.

Suggested Citation

  • John T. Wenders, 1976. "Peak Load Pricing in the Electric Utility Industry," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 232-241, Spring.
  • Handle: RePEc:rje:bellje:v:7:y:1976:i:spring:p:232-241

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    References listed on IDEAS

    1. Edwin Mansfield & John Rapoport & Anthony Romeo & Samuel Wagner & George Beardsley, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, Oxford University Press, vol. 91(2), pages 221-240.
    2. Mansfield, Edwin, 1980. "Basic Research and Productivity Increase in Manufacturing," American Economic Review, American Economic Association, vol. 70(5), pages 863-873, December.
    3. Berndt, Ernst R & Christensen, Laurits R, 1974. "Testing for the Existence of a Consistent Aggregate Index of Labor Inputs," American Economic Review, American Economic Association, vol. 64(3), pages 391-404, June.
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    Cited by:

    1. Sheen, J.N., 2006. "Incentive pricing and economic profitability of load management program," Energy, Elsevier, vol. 31(12), pages 2193-2209.
    2. N. Vijayamohanan Pillai, 2003. "A contribution to peak load pricing theory and application," Centre for Development Studies, Trivendrum Working Papers 346, Centre for Development Studies, Trivendrum, India.
    3. Oggioni, Giorgia & Smeers, Yves, 2012. "Evaluating the application of different pricing regimes and low carbon investments in the European electricity market," Energy Economics, Elsevier, vol. 34(5), pages 1356-1369.
    4. Porat, Yigal & Irith, Rotlevi & Turvey, Ralph, 1997. "Long-run marginal electricity generation costs in Israel," Energy Policy, Elsevier, vol. 25(4), pages 401-411, March.
    5. K. Beck & P. Zweifel, 1988. "Warum eine Grenzkostentarifierung für Elektrizität?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 124(IV), pages 543-558, December.
    6. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters,in: Studies in Public Regulation, pages 1-78 National Bureau of Economic Research, Inc.
    7. John G. Riley & Charles R. Scherer, 1976. "Optimal Water Pricing with Cyclical Supply and Demand," UCLA Economics Working Papers 077, UCLA Department of Economics.
    8. Alayo, Hans & García, Raúl, 2015. "A static deterministic linear peak-load pricing model for the electricity industry: Application to the Peruvian case," Energy Economics, Elsevier, vol. 50(C), pages 202-206.
    9. Friedman, Lee S., 2011. "The importance of marginal cost electricity pricing to the success of greenhouse gas reduction programs," Energy Policy, Elsevier, vol. 39(11), pages 7347-7360.
    10. José Pablo Arellano, 2004. "Principios para Tarificar la Transmisión Eléctrica," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(123), pages 231-253.
    11. Simshauser, Paul, 2016. "Distribution network prices and solar PV: Resolving rate instability and wealth transfers through demand tariffs," Energy Economics, Elsevier, vol. 54(C), pages 108-122.
    12. Ted Bergstrom & Jeff Mackie-Mason, "undated". "The Simple Analytics of Peak-Load Pricing," Papers _035, University of Michigan, Department of Economics.

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