Author

KYUNG HUN LEE

Date of Graduation

1980

Document Type

Dissertation/Thesis

Abstract

With growing dependency on electric energy, anxiety exists regarding the sufficiency of the nation's energy resources in meeting electric energy demand under the constraints of increasing costs of generation and environmental impacts. This electric energy sufficiency can be achieved by either improving efficiency within the industry or finding substitutes for existing energy resources. With such prospects, the choice remaining is to improve the allocative efficiency of the industry through the proper utilization of energy resources. Given evidence of underutilization of existing capacity and overinvestment in capacity, this research attempts to solve the allocative inefficiency problem through marginal cost pricing. This research consists of three objectives: (1) analyze the relevance of marginal cost pricing in the electricity industry, (2) estimate marginal cost in the dimensions of period of demand and investment time horizon under alternative definitions--shadow price, "textbook" marginal cost, "textbook" long run incremental cost, present worth of incremental system costs, and average incremental cost, (3) and evaluate the alternative marginal cost estimates under several criteria--price stability, economic efficiency, equity over the per of demand, and revenue stability and generation. In estimating marginal costs, shadow price is estimated by Turvey-Anderson's "global model", using the linear programming technique and simulated data. Other marginal costs are computed on the basis of output and costs generated by the Turvey-Anderson model. These cost estimations integrate both short-run and long-run approaches, taking into account the joint cost of electricity generation and capital indivisibility, and reconciling traditional peak-load pricing and current criticisms. Past estimation approaches have not produced prices to achieve both short-run and long-run efficiency simultaneously. In estimating peak-load prices, peak-load prices for peak periods tend to be upward-biased. Therefore, this research estimated shadow price by a fuel/capital substitution technique. Other alternative definitions are estimated by two types--A-type and B-type. In A-type, capacity costs are allocated to peak period only, while in B-type, capacity costs are allocated to both peak and shoulder-peak periods. Estimates by a reconciliation between traditional peak-load pricing and current criticisms results in less upward-biased estimates for the peak period. A reason is that B-type allocation and the fuel/capital substitution technique tend to make significant contributions to price stability, equity across the period of demand, economic efficiency, and stable moderate revenue generation. An evaluation of alternative marginal costs estimates indicates that (1) average incremental cost is a superior basis for marginal cost pricing applicable to the capital-intensive electric utility industry, (2) "shadow price" pricing is considered to be an efficient, stable, and equitable pricing rule when electricity demand forecasts are accurate and the periods of demand are independent, (3) and the "textbook" long run incremental cost pricing rule is found to be an inferior alternative.

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