Regulatory Preferences and Two-Part Tariffs: The Case of Electricity. by Micheal C Naughton. Presented by Julius Kimutai

Introduction. The purpose of this paper is to develop and to demonstrate a method of deriving and testing regulatory preferences within and across customer classes. To assess the impact of this preferences on price structures and regulatory effectiveness in the electric utility industry. It employs Two-part tariff framework in the derivation of both intraclass(within customer class) and interclass(across customer class) preferences. As with optimal two-part tariffs, variable preferences are incorporated into a weighted social surplus function which regulators are assumed to maximize.

1. A model for regulatory pricing. a. For residential customers(due to existence of income effects.)

b. For no-residential customers (because of non- existence of income effects). The producer surplus of the regulated firm is defined as

The Regulator’s Optimal Prices. A. The weighted social surplus of consumer class i is given as:-

B. The regulator is assumed to maximize the sum of the weighted consumer and producer surplus, prices are the solution to

Using Ramsey prices

Estimation of Demand Elasticities. A demand model is developed and used to derive estimates of Kwh output and connection demand elasticities with respect to the per-unit and fixed prices for each customer class. These estimates are used to generate regulator’s Ramsey numbers and to develop second-best efficient and monopoly price structures in the section that follow.

Sample Data and results. The models was fitted to 1980-cross section of privately owned electric utilities.

Estimation results. All elasticity estimates in the table are significant except for residential class cross elasticities. The also found out that output demand elasticities w.r,t per unit price are consistent with a range estimates by Taylor and Bohi. But connection demand elasticities w.r.t to the unit price.However, it makes intuitive sense that is less elastic in the residential class as compared to industrial and commercial class.

Regulatory preferences and price structures.

Explanations

Cntd.

Summary and conclusions