332 PROCEEDINGS OF THE IEEE, VOL. 69, NO. 3, MARCH 1981
Principles of Modern Electricity Pricing MOHAN MWASINGHE, SENIOR MEMBER, IEEE
Ahfruct-This paper presents a f.ramework for electric power pricing,
reviews the basic theory of marginal cost pricing applicable to the
power sector, and summarizes recent developments. The adaptation of
the theory for practical application in relation to the objectives of
power pricing policy results in a two stage procedure for tariff setting.
First, the detailed structure of the strict long-mn marginal costs
(LRMC) of supply which meet the economic efficiency criterion are
computed. Second, the strict LRMC is adjusted to arrive at an appre
priate realistic taxiff schedule which satisfies other constraints, induding
economic second best and social lifeline rate considerations,
hnancial needs, simplicity of metering and billing, etc. The results ob
tained through past applications of modem pricing structures intemationally
are reviewed, and the U.S. situation is discussed with respect to
the Public Utility RegulatorPy dicies Act (PURPA) of 1978.
M I. INTRODUCTIONA ND OVERVIEW
ODERN societies have become increasingly dependent
on various types of energy sources, among which electric
power has occupied a dominant position. Traditionally,
electric power pricing policy in most countries has
been determined mainly on the basis of financial or accounting
criteria, e.g., raising sufficient sales revenues to meet operating
expenses and debt service requirements while providing a reasonable
contribution towards the capital required for future
power system expansion.
However, in recent times several new factors have arisen,
including the rapid growth of demand, the increase in fuel oil
prices and prices of fossil fuel and nuclear plant, the dwindling
availability of cheaply exploitable hydroelectric resources, and
the expansion of power systems into areas of lower consumer
density at relatively high unit costs. These developments have
led to increasing emphasis being laid on the use of economic
principles in order to produce and consume electric power
efficiently, while conserving scarce resources, and meeting
various national objectives. In particular, a great deal of
attention has been paid to the use of marginal cost pricing
policies in the electric power sector. We note that price is an
effective “soft” technique of demand management especially