Fifth, and finally, other economic and political requirements
must also be considered. These might include, for example,
subsidized electricity supply to certain sectors in order to
enhance growth or to certain geographic areas for regional
development.
Since the above criteria are often in confiict with one another,
it is necessary to accept certain tradeoffs between them.
The LRMC approach to price setting described below has both
the analytical rigor and inherent flexibility to provide a tariff
structure that is responsive to these basic objectives.
B. LRMC-Based Tariffs
A tariff based on LRhiC is consistent with the first objective,
that is, the efficient allocation of resources. The traditional
accounting approach is concerned with the recovery of historical
or sunk costs, while in the LRMC calculation the important
consideration is the amount of future resources used or
saved by consumer decisions. Since electricity prices are the
amounts paid for increments of consumption, in general they
should reflect the incremental cost incurred. Supply costs increase
if existing consumers increase their demand or if new
consumers are connected to the system. Therefore, prices that
act as a signal to consumers should be related to the economic
value of future resources required to meet consumption
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ELECTRICITY PRICING 333
changes. The accounting approach that uses historical assets
and embedded costs implies that future economic resources
will be as cheap or as expensive as in the past. This could lead
to overinvestment and waste, or underinvestment and the additional
costs of unnecessary scarcity.
To promote better utilization of capacity, and to avoid unnecessary
investments to meet peak demands, which tend to
grow very rapidly, the LRMC approach permits the structuring
of prices so that they vary according to the marginal costs of
serving demands: a) by different consumer categories; b) in
different seasons; c) at different hours of the day; d) by different
voltage levels; e) in different geographical areas; and
so on.
In particular, with an appropriate choice of the peak period,
structuring the LRMC-based tariffs by time of day generally
leads to the conclusion that peak consumeis should pay both
capacity and energy costs, whereas offpeak consumers should
pay only the energy costs. Similarly, analysis of LRMC by
voltage level usually indicates that the lower the service voltage,