in the long run. The effects of pricing policy are also greatly
enhanced by coordinating it properly with other “soft” demand
management tools such as financial/tax incentives, and
“hard” demand management techniques including load control,
etc., that are more useful in the short run.
The objectives of power tariff policy in the national context,
and a pricing framework based on long-run marginal costs
(LRMC) which meets these requirements, are summarized in
this section. In Section 11, the economic principles underlying
the LRMC approach are described, and in Section 111, a framework
for calculating strict LRhfC is presented. The process
of adjusting LRMC to devise a practical tariff structure which
Manuscript received January 4, 1980;revised October 22, 1980.
The author is with the Energy Department, The World Bank, Wash-
The opinions expressed in this paper are the author s, and not necesington,
DC 20433.
sarily the views of the World Bank or its affiliated organizations.
meets other national constraints is discussed in Section IV.
Section V contains a review of recent results of modem pricing
structures in several countries and a discussion of the
implications of the Public Utilities Regulatory Policies Act
(PURPA) of 1978 in the U.S., and this is followed by a technical
appendix.
A. Requirements of a Power Tariff
The modem approach to power pricing recognizes the existence
of several objectives or criteria, not all of which are mutually
consistent. First, national economic resources must be
allocated efficiently, not only among different sectors of the
economy, but within the electric power sector. This implies
that cost-reflecting prices must be used to indicate to the electricity
consumers the true economic costs of supplying their
specific needs, so that supply and demand can be matched
efficiently.
Second, certain principles relating to fairness and equity
must be satisfied, including: a) the fair allocation of costs
among consumers according to the burdens they impose on
the system; b) the assurance of a reasonable degree of price
stability and avoidance of large price fluctuations from year to
year; and c) the provision of a minimum level of service to
persons who may not be able to afford the full cost.
Third, the power prices should raise sufficient revenues to
meet the financial requirements of the utility, as described
earlier. Fourth, the power tariff structure must be simple
enough to facilitate the metering and billing of customers.