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Energy Pricing

  • Michael G. Webb
  • Martin J. Ricketts
Chapter

Abstract

The choice of an energy pricing policy is concerned with the answering of a number of interrelated questions such as: On what basis should energy prices be set? What should be the relationship between the prices of the various forms of energy? At what rate should a fossil fuel be depleted? To what extent should energy prices be used to achieve equity objectives? Should energy prices reflect associated environmental costs? It is thus clear that the subject-matter of this chapter in inextricably linked with that of the preceding and following chapters.

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Notes and References

  1. 4.
    R. Halvorsen, ‘Residential Demand for Electrical Energy’, Review of Economics and Statistics, vol. 57, no. 1 (Feb 1975) pp. 12–18.CrossRefGoogle Scholar
  2. 6.
    A. S. Deaton, ‘The Measurement of Income and Price Elasticities’, European Economic Review, vol. 6 (1975) pp. 261–73.CrossRefGoogle Scholar
  3. 8.
    See also W. D. Nordhaus, ‘The Demand for Energy: An International Perspective’, Cowles Foundation Discussion Paper, No. 405 (26 Sep 1975).Google Scholar
  4. 11.
    See, for example, R. Turvey, Economic Analysis and Public Enterprises (London: Allen & Unwin, 1971) chap. 3.Google Scholar
  5. 13.
    There is a large literature on the economics of peak-load pricing. Some useful references are: P. O. Steiner, ‘Peak Loads and Efficient Pricing’, Quarterly Journal of Economics (Nov 1957); O. E. Williamson, ‘Peak Load Pricing and Optimal Capacity under Indivisibility Constraints’, American Economic Review (Sep 1966); H. Mohring, ‘The Peak Load Problem with Increasing Returns and Pricing Constraints’, American Economic Review (Sep 1970); J. R. Nelson (ed.), Marginal Cost Pricing in Practice (Englewood Cliffs, N.J.: Prentice-Hall, 1964) (this volume contains translations of many of the most important papers by French writers on the theory underlying the Green Tariff of Electricité de France); I. Pressman, ‘A Mathematical Formulation of the Peak Load Problem’, Bell Journal of Economics and Management Science, vol. l, no. 2 (Autumn 1970); M. A. Crew and P. E. Kleindorfer, ‘Peak Load Pricing with a Diverse Technology’, Bell Journal of Economics, vol. 7, no. 1 (Spring 1976).Google Scholar
  6. 15.
    See R. Turvey, Optimal Pricing and Investment in Electricity Supply (London: Allen & Unwin, 1968); and J. T. Wenders, ‘Peak Load Pricing in the Electric Utility Industry’, Bell Journal of Economics, vol. 7, no. 1 (Spring 1976).Google Scholar
  7. 18.
    See R. Turvey, ‘Marginal Cost Pricing in Practice’, Economica (Nov 1964); and M. G. Webb, The Economics of Nationalised Industries (London: Nelson, 1973) pp. 100–1 and 114–15.Google Scholar
  8. 21.
    In this connection it is interesting to note that the economists at Electricité de France have claimed that they can calculate the relevant marginal costs simply by reference to marginal operating costs on the assumption that the investment programme is optimal: ‘when the capacity of fixed assets assures least-cost production, the cost of expansion is equal to the marginal cost of operation of existing plants’. See M. Boiteux and P. Stasi, ‘The Determination of Costs of Expansion of an Interconnected System of Production and Distribution of Electricity’, in J. R. Nelson (ed.), Marginal Cost Pricing in Practice (Englewood Cliffs, N.J.: Prentice-Hall International, 1964) chap. 5, p. 94.Google Scholar
  9. 22.
    On this issue see R. Turvey and D. Anderson, Electricity Economics (Baltimore and London: Johns Hopkins University Press, 1977).Google Scholar
  10. A rather less detailed and simpler discussion of the design of electricity tariffs will be found in M. G. Webb, Power Sector Planning Manual (London: Ministry of Overseas Development, 1979).Google Scholar
  11. 26.
    See ‘Domestic Tariffs Experiment’, Load and Market Research Report, No. 21 (London: Electricity Council, 1975); and J. G. Boggis, ‘An Electricity Pricing Experiment in England and Wales’, in H. M. Trebing (ed.), New Dimensions in Public Utility Pricing (East Lansing, Mich.: Michigan State University Public Utilities Studies, 1976).Google Scholar
  12. 32.
    This view has been put forward by a number of authors. See, for example, M. G. Webb, Pricing Policies for Public Enterprises (London: Macmillian, 1976); and W. Vickrey in Trebing (ed.), New Dimensions in Public Utility Pricing, op. cit. p. 547.Google Scholar
  13. 34.
    See, for example, Turvey, Optimal Pricing and Investment in Electricity Supply, op. cit.; and R. W. Bates and N. Fraser, Investment Decisions in the Nationalised Fuel Industries (London: Cambridge University Press, 1974) chap. 5.Google Scholar
  14. 38.
    For an interesting exercise in the calculation of these shadow prices for the U.K. energy sector before the 1973 oil price rises see Michael Posner, Fuel Policy: A Study in Applied Economics (London: Macmillan, 1973).Google Scholar
  15. 39.
    I. M. D. Little and J. Mirrlees, Project Appraisal and Planning for Developing Countries (London: Heinemann, 1974);Google Scholar
  16. 39.
    and also Lyn Squire and H. G. van der Tak, Economic Analysis of Projects, A World Bank Research Publication (Baltimore and London: Johns Hopkins University Press, 1975).Google Scholar
  17. 42.
    On the economics of regulation of private utilities see E. E. Bailey, Economic Theory of Regulatory Constraint (Lexington, Mass.: Lexington Books, D. C. Heath, 1973).Google Scholar
  18. 44.
    See R. Rees, Public Enterprise Economics (London: Weidenfeld & Nicolson, 1976) p. 105.Google Scholar
  19. 47.
    See, for example, M. S. Feldstein, ‘Distributional Equity and the Optimal Structure of Public Prices’, American Economic Review, vol. 62, no. 1 (Mar 1972) pp. 32–6,Google Scholar
  20. and M. S. Feldstein, ‘Equity and Efficiency in Public Sector Pricing: The Optimal Two-Part Tariff’, Quarterly Journal of Economics, vol. 86, no. 2 (May 1972) pp. 175–87.CrossRefGoogle Scholar
  21. 48.
    It has been estimated that in Great Britain in the year April 1975 to March 1976 poorer households with average incomes of £1300 had fuel costs which represented 10% of their income, while for richer households with average incomes of £4500 fuel costs took only 5% of income. See Julia Field and B. Hedges, National Fuel and Heating Survey (London: Social and Community Planning Research, 1977).Google Scholar
  22. 51.
    See, for example, J. W. Howe, ‘Lifeline Rates — Benefits for Whom?’, Public Utilities Fortnightly, vol. 97, no. 3 (1976) pp. 22–5; and Paying for Fuel, National Consumer Council Report No. 2 (London: H.M.S.O., 1976).Google Scholar

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© Michael G. Webb and Martin J. Ricketts 1980

Authors and Affiliations

  • Michael G. Webb
  • Martin J. Ricketts

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