peak period consumers. Therefore, if the capacity costs of
base load generating units are included in the calculations, it
is very important to net out potential fuel savings due to
displacement of less efficient plant by these new base load
units (see Appendix for details). Even intuitively, it would not
be sensible to incorrectly charge peak consumers the highcapacity
costs of expensive base load units (e.g., nuclear), thus
encouraging them, for example to install their own captive gas
turbine plant.
Next, the LRMC of transmission and distribution (T&D) are
calculated. Generally, all T&D investment costs (except customer
costs-discussed later) are allocated to incremental capacity,
because the designs of these facilities are determined
principally by the peak kilowatt that they carry rather than
the kwh. However, particularly at the distribution level, the
size of a given feeder may depend on local peak demand which
may not occur within the system peak period and this could
complicate the problem of allocating distribution capacity
costs among the various rating periods [3]. The concept of
structuring by voltage level may be introduced at this stage.
Consider three supply voltage categories: high, medium, and
low (HV, MV, LV). Since consumers at each voltage level are
charged only upstream costs, capacity costs at each voltage
level must be identified.
The simplest approach is to use the average incremental cost
(AIC) method to estimate the LRMC of T&D. Suppose that in
year i, AMWi, and Ii are the increase in demand served (relative
to the previous year), and the investment cost respectively.
Then, the AIC of capacity is given by:
AIC = 1 i=o
where r is the discount rate (e.g., the opportunity cost of capital),
T is the planning horizon (e.g., 10 years), and L is the
average time delay between the investment and commissioning
dates for new facilities. We note that in the AIC method the
actual additional increments of demand are considered as they
occur, rather than the hypothetical fixed demand increment
AD used (more rigorously) in calculating generation LRMC.
However, because there is no problem of plant mix with T&D
investments, AIC and the hypothetical increment method will
yield similar results, while AIC is also usually much easier to
calculate using readily available planning data. An alternative