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Peak load pricing of public utilities: reply
Rejoinder/Book
review
Peak load pricing of public utilities: reply I am delighted to have the opportunity to clarify two points that apparently were not sufficiently clear in the original exposition’ and which may have caused Professors Crew and Kleindorfer to misinterpret my proposal. Their first comment deals with the cost of metering. Crew and Kleindorfer concentrate on time-ofday metering, which they claim involves high costs. However, the proposal concentrates (for practical purposes) on a seasonal basis. Thus, on page 189 it is stated that ‘consumers pay the off-peak price for a quantity up to their average offpeak monthly consumption . _.’ and then three paragraphs later, ‘Since the proposed two-price system is based on periodic (monthly) averages . . .‘. Thus, for example, charging different prices for peak months does not seem to require a high investment in a metering system. The existing meter already measures the monthly consumption and there is no particular problem in averaging groups of months and comparing the discrete monthly (records) of consumption. Hence, even if the ‘lunch is not free’, its price is trivial and therefore can (and should) be overlooked when evaluating the practicability of the proposal. Their second (and in my mind, more important) comment has to do with the efficiency of the pricing system. Here, Crew and Kleindorfer raise three points. The first relates to marginal cost pricing. In my proposed system, starting from conditions of full utilization of existing capacity, of different types of demand, each new customer is charged the price that covers all the costs involved in supplying his demand in the long run. These prices will supply the electric company with the signals to invest the right type of facilities. The second point has to do with the Steiner pricing system of b for off-peak and b +/3 for peak load. This system is consistent with constant returns to scale, but is not consistent with the existence of economies of scale in production and the recovery of full costs. With constant returns to scale, there is no need for a regulated monopoly
138
since a competitive market structure can prevail. Economies of scale is a common characteristic of electric companies, and a pure marginal cost pricing of charging b and b +/3 prices will not cover all costs of production. With different types of electric generators, different p’s exist, but the system advocated by Crew and Kleindorfer does not specify the 13 to be used as a base for pricing. Moreover, the b and b +fl price system may have other problems in implementation, problems that my proposed system avoids. One example is the practical accounting problem of the separation of costs into shortrun marginal costs b and the capacity costs fl (where the short-run marginal cost b is not necessarily identical to fuel). The marginal cost b depends of course on the time period. Thus, in the system supported by Crew and Kleindorfer, with price differentials for day and night times, b is actually equal to zero, which seriously affects the practical implementation of such a system even for time-of-day pricing. With nuclear reactors as a source of electricity it seems that b = 0 even for periods as long as a month, which may raise some problems for the
implementation of the system on a seasonal basis. Under such production conditions the short-run changes in capacity can be achieved by using different types of generators. Once again marginal cost pricing is consistent with the system proposed in the original article. The third point raised by Crew and Kleindorfer is the criticism of the system known as load rate tariff, but this system differs from the one proposed in my article (p 189). There is no point in spelling out these differences again. However, Professors Crew and Kleindorfer appear to have overlooked (or perhaps misinterpreted) a crucial difference between the two systems, ie the pricing formula for handling extra consumption. In my proposal the extra consumption will be charged at higher prices only if they are consumed in the company’s peak period, and not in the consumer’s peak period as is the case with the load rate tariff. Yoram C. Peles Jerusalem School of Business Administration Jerusalem, Israel ’ Yoram C. Peles, ‘A proposal for peak loed pricing of public utilities’, Energy Economics, Vol 3, No 3, July 1981, pp 187-190.
Book review LA DEMANDE D’ENERGIE SUISSE (Energy Needs in Switzerland)
EN
by Charles Spieren
Librairie Droz, Geneva, Paris, 1982, 209 PP ‘Nobody writes the history of contented people’. This French proverb can also apply to countries, and particularly to Switzerland, high on the list of privileged nations. Hence the importance we attach to the publication of La Demande d’Energie en Suisse, which seeks to shed some light upon the elements which determined the consumption of energy during the period 1960- 1979.
The aim of the study - originally a doctoral thesis - is to contribute to the quantitative analysis of energy demand in Switzerland. On reading it, however, another aim is discerned: to use the model obtained for longterm forecasting. To our mind the strength and the weakness of the study rise from this double ambition. At the outset one must emphasize the intellectual integrity of the author, who quotes scrupulously the origins of all the methods he uses, and who is also explicit about all his statistical sources. The method chosen is of an econometric type, the variables required for the model being mainly aggregates of national accountancy and energy accountancy to which are added
ENERGY ECONOMICS April 1983
review
Peak load pricing of public utilities: reply I am delighted to have the opportunity to clarify two points that apparently were not sufficiently clear in the original exposition’ and which may have caused Professors Crew and Kleindorfer to misinterpret my proposal. Their first comment deals with the cost of metering. Crew and Kleindorfer concentrate on time-ofday metering, which they claim involves high costs. However, the proposal concentrates (for practical purposes) on a seasonal basis. Thus, on page 189 it is stated that ‘consumers pay the off-peak price for a quantity up to their average offpeak monthly consumption . _.’ and then three paragraphs later, ‘Since the proposed two-price system is based on periodic (monthly) averages . . .‘. Thus, for example, charging different prices for peak months does not seem to require a high investment in a metering system. The existing meter already measures the monthly consumption and there is no particular problem in averaging groups of months and comparing the discrete monthly (records) of consumption. Hence, even if the ‘lunch is not free’, its price is trivial and therefore can (and should) be overlooked when evaluating the practicability of the proposal. Their second (and in my mind, more important) comment has to do with the efficiency of the pricing system. Here, Crew and Kleindorfer raise three points. The first relates to marginal cost pricing. In my proposed system, starting from conditions of full utilization of existing capacity, of different types of demand, each new customer is charged the price that covers all the costs involved in supplying his demand in the long run. These prices will supply the electric company with the signals to invest the right type of facilities. The second point has to do with the Steiner pricing system of b for off-peak and b +/3 for peak load. This system is consistent with constant returns to scale, but is not consistent with the existence of economies of scale in production and the recovery of full costs. With constant returns to scale, there is no need for a regulated monopoly
138
since a competitive market structure can prevail. Economies of scale is a common characteristic of electric companies, and a pure marginal cost pricing of charging b and b +/3 prices will not cover all costs of production. With different types of electric generators, different p’s exist, but the system advocated by Crew and Kleindorfer does not specify the 13 to be used as a base for pricing. Moreover, the b and b +fl price system may have other problems in implementation, problems that my proposed system avoids. One example is the practical accounting problem of the separation of costs into shortrun marginal costs b and the capacity costs fl (where the short-run marginal cost b is not necessarily identical to fuel). The marginal cost b depends of course on the time period. Thus, in the system supported by Crew and Kleindorfer, with price differentials for day and night times, b is actually equal to zero, which seriously affects the practical implementation of such a system even for time-of-day pricing. With nuclear reactors as a source of electricity it seems that b = 0 even for periods as long as a month, which may raise some problems for the
implementation of the system on a seasonal basis. Under such production conditions the short-run changes in capacity can be achieved by using different types of generators. Once again marginal cost pricing is consistent with the system proposed in the original article. The third point raised by Crew and Kleindorfer is the criticism of the system known as load rate tariff, but this system differs from the one proposed in my article (p 189). There is no point in spelling out these differences again. However, Professors Crew and Kleindorfer appear to have overlooked (or perhaps misinterpreted) a crucial difference between the two systems, ie the pricing formula for handling extra consumption. In my proposal the extra consumption will be charged at higher prices only if they are consumed in the company’s peak period, and not in the consumer’s peak period as is the case with the load rate tariff. Yoram C. Peles Jerusalem School of Business Administration Jerusalem, Israel ’ Yoram C. Peles, ‘A proposal for peak loed pricing of public utilities’, Energy Economics, Vol 3, No 3, July 1981, pp 187-190.
Book review LA DEMANDE D’ENERGIE SUISSE (Energy Needs in Switzerland)
EN
by Charles Spieren
Librairie Droz, Geneva, Paris, 1982, 209 PP ‘Nobody writes the history of contented people’. This French proverb can also apply to countries, and particularly to Switzerland, high on the list of privileged nations. Hence the importance we attach to the publication of La Demande d’Energie en Suisse, which seeks to shed some light upon the elements which determined the consumption of energy during the period 1960- 1979.
The aim of the study - originally a doctoral thesis - is to contribute to the quantitative analysis of energy demand in Switzerland. On reading it, however, another aim is discerned: to use the model obtained for longterm forecasting. To our mind the strength and the weakness of the study rise from this double ambition. At the outset one must emphasize the intellectual integrity of the author, who quotes scrupulously the origins of all the methods he uses, and who is also explicit about all his statistical sources. The method chosen is of an econometric type, the variables required for the model being mainly aggregates of national accountancy and energy accountancy to which are added
ENERGY ECONOMICS April 1983