The Move towards Marginal Cost Pricing in Electricity

by Jan Paul Acton

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A discussion of feasibility of using marginal cost pricing for electricity rates. Since present rate structures which charge less per unit as the customer consumes more were established, there have been dramatic increases in amount of electricity consumed, as well as changes in patterns of use. Beginning in 1965 utilities began to encounter increases in capital and operating expenses. There are also long-term environmental and conservation reasons for changing the present rate structure. Rates based on marginal cost are appropriate and have been shown in Europe to be administratively feasible. A residential rate experiment conducted by the Los Angeles Department of Water and Power and The RAND Corporation using 2,000 households is described. Reaction to a variety of experimental rates will be measured, to observe number of kilowatt hours consumed, changes in consumption during peak and off-peak periods, and the impact of these rates on consumption of natural gas.

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