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Welfare-Optimal Pricing and Capacity Selection under an Ex Ante Maximum Demand Charge

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  • Lee, Seong-Uh

Abstract

This paper deals with the simultaneous determination of welfare-optimal pricing and investment rules under a multi-period ex ante maximum demand charge by allowing the possibility of purchasing electricity from third party generators at some cost when excess demand occurs. I show that at the optimal size of capacity, expected short-run marginal shortage cost and long-run marginal capacity cost should be equal. The optimal maximum demand tariff does not entail marginal cost pricing. In general, it is shown that maximum demand charges are welfare superior to marginal cost pricing when tariffs must be set ex ante, before demand is known. Copyright 1993 by Kluwer Academic Publishers

Suggested Citation

  • Lee, Seong-Uh, 1993. "Welfare-Optimal Pricing and Capacity Selection under an Ex Ante Maximum Demand Charge," Journal of Regulatory Economics, Springer, vol. 5(3), pages 317-335, September.
    • Handle: RePEc:kap:regeco:v:5:y:1993:i:3:p:317-35
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    Cited by:

    1. Bernard, Jean-Thomas & Roland, Michel, 2000. "Load management programs, cross-subsidies and transaction costs: the case of self-rationing," Resource and Energy Economics, Elsevier, vol. 22(2), pages 161-188, May.
    2. Brown, David P. & Sappington, David E.M., 2018. "On the role of maximum demand charges in the presence of distributed generation resources," Energy Economics, Elsevier, vol. 69(C), pages 237-249.
    3. Joan Calzada, 2007. "Capacity-based versus time-based access charges in telecommunications," Journal of Regulatory Economics, Springer, vol. 32(2), pages 153-172, October.

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