Economic Principles and the Structure of Electric Rates

Cost of Service, Allocation of Costs, and Rate Design

by Jan Paul Acton, Bridger M. Mitchell

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Abstract

During June and July 1975, the Board of Commissioners of the Los Angeles Department of Water and Power held a series of special public meetings before its Electric Rate Structure Committee in order to inform itself and the public about both traditional and recently proposed methods of determining the structure of electricity rates. RAND researchers were invited to participate in the meetings and to present information on the costs of producing electricity and the role of rate structures from the perspective of economics. They discussed some of the issues and implications involved in basing rates on the marginal costs of production and distribution of electricity. This paper is an edited version of their presentation and discussion. It presents the testimony and discussion on the topics of cost of service, allocation of costs to class of customer, and design and form of rates.

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