mutually self-consistent. In practice, uncertainties in
price elasticities of demand and other data may dictate a more
pragmatic approach in which the LRMC results would be used
after only one iteration to devise new power tariffs and to implement
them. The demand behavior is then observed over
some time period; the LRMC is re-estimated and tariffs are
revised to move closer to the optimum, which may itself have
336 PROCEEDINGS OF THE IEEE, VOL. 69, NO. 3, MARCH 1981
shifted, as described previously. An extreme form of price
feedback could result in a shift of the peak outside the original
peak period, especially if the latter was too narrowly defined.
That is, peak load pricing may shift the demand peak, from
one pricing period to another. If sufficient data on the price
elasticity of demand were available, theory indicates that each
potential or secondary peak should be priced to keep its magnitude
just below the available capacity level. Since the necessary
information would rarely be available in practice, a combination
of techniques including use of a sufficiently wide peak
period, redefining the peak period to include both the actual
and potential peaks, direct switching of certain consumer
loads, and so on, may be used to avoid the shifting peak
problem.
Second, the interrelated issues of supply and demand uncertainty,
reserve margins, and costs of shortages raise certain
problems. Since the least cost system expansion plan to meet
the demand forecast is generally determined assuming some
(arbitrary) target level of system reliability (e.g., loss-of-load
probability (LOLP), reserve margin, etc.), the marginal costs
depend on the target reliability level [ 261. However, economic
theory suggests that reliability should also be treated as
a variable to be optimized, and both price and capacity (or
equivalently, reliability) levels should be optimized simultaneously.
The optimal price is the marginal cost price, while
the optimal reliability level is achieved when the marginal cost
of capacity additions are equal to the expected value of economic
cost savings to consumers due to electricity supply
shortages averted by those capacity increments. These considerations
lead to a more generalized approach to system expansion
planning [ 25 ] .
Consider a simple expression for the net benefits NB of electricity
consumption, which is to be maximized:
NB(D, R=) TB(D)- SC(D, R ) - OC(D, R )
where TB is total benefits of consumption if there were no