Economics of Alternative Price Structures (Linear and Non-Linear Rates, Peak-Load Pricing, Multi-Part Tariff, Price Discrimination, etc.)

Core References

Basics of Rate Design – Pricing Principles and Self-Selecting Two-Part Tariffs
in Infrastructure Regulation and Market Reform: Principles and Practice, edited by Margaret Arblaster and Mark Jamison. Canberra, Australia: ACCC and PURC, 1998, pp. 74-90.
Berg, S.

Explains that multipart pricing enables the supplier to create win-win options — bringing the marginal price down to incremental cost, while recovering current capacity costs via fixed monthly fees. Further explains that incremental cost pricing promotes the efficient use of society’s resources, and price options enable the supplier to extract more consumer surplus than under uniform pricing. Further explains Ramsey pricing and its efficiency aspects.

The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, vol. I, Chapters 3-7, vol. II, Chapter 5.
Kahn, Alfred

Describes pricing issues in utility regulation, giving practical examples and explaining the underlying economics. Explains economic efficiency in the context of pricing. Considers marginal cost pricing, peak load pricing, short-run and long-run marginal costs, effects of scale economies, externalities, Ramsey pricing, fully distributed costs, effects of competition, cream-skimming, and price discrimination.

Sectoral References

ELECTRICITY

Dynamic Pricing, Advanced Metering, and Demand Response in Electricity Markets
CSEM Working Papers, CSEMWP-105, University of California at Berkeley, 2002.
Borenstein, S., M. Jaske, and A. Rosenfeld

Discusses the possibility of enhancing the participation of the demand side in electricity markets through dynamic pricing, which could help balance supply and demand. Provides an overview of the theory and practice of the different approaches used to achieve such an objective and concludes by suggesting a wider use of dynamic retail pricing. Argues that this measure would allow end-user prices to reflect changes in wholesale prices and the gap between supply and demand.

Economics of Regulation and Antitrust
Cambridge, MA: MIT Press. 2000, Chapter 12.
Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington, Jr.

Discusses the economics of price structures, including fully distributed cost, price discrimination, and peak-load pricing.

Pricing Energy in Developing Countries
June 2001.
World Energy Council

Examines historical cost recovery, marginal costs, opportunity costs, market-based pricing, subsidies, pricing for industrial customers, and special problems in a developing country context.

GAS

Natural Gas Pricing in Competitive Markets
Washington, D.C.: Organization for Economic Cooperation and Development, 1998.
OECD/IEA

Describes the process of introducing competition in the natural gas industry. Analyzes the main economic principles that apply to contracting and pricing mechanisms in a competitive framework. Surveys the reform experiences in the U.S., Canada, and the U.K., and discusses their applicability to other countries, particularly in continental Europe.

TELECOMMUNICATIONS

ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007, Module 2.

Provides a practical overview of telecommunications pricing issues and regulatory approaches.

Decision for Approving the Regulation for the Realization of the Top-down Long Run Incremental Costing Model by Mobifon S.A.
18 December 2003.
Romanian National Regulatory Authority for Communications

Describes the economics of estimating incremental costs in telecommunications in compliance with European Union directives.

TRANSPORTATION

Transport Economics
2nd Edition. Brookfield, Vermont: Edward Elgar Publishing Company, 1993.
Button, Kenneth J

Provides an extensive discussion on the pricing of transport services, including peak-load pricing, Ramsey pricing and price discrimination and backhaul pricing in transportation.

WATER

Marginal Cost Rate Design and Wholesale Water Markets: Advances in the Economics of Environmental Resources
vol. 1. Greenwich, CT: JAI Press, 1996.
Hall, D., ed.

Collects eleven papers analyzing the political economy of water and evaluating the success of emerging wholesale water markets and retail marginal cost pricing. Provides a methodology for the calculation of marginal cost for water rates, and applies it to the design of urban water rates. Surveys various case studies in which such policies have been implemented and discusses the importance of water markets as a mechanism to address water scarcity.

Expanding Water and Sanitation Services to Low-Income Households
Note no. 178 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 1998.
Komives, Kristin, and Penelope J. Brook Cowen

Explains that if service expansion is to be sustainable, a concessionaire must be able to recover its costs. Three potential disconnects between the tariff structure and the regulatory objectives include water usage being below costs for low-consumption customers, a household with a water connection but no sewer connection, and the maximum connection fees not reflecting the true cost of connection.

Key Words

Price structure, Peak-load pricing, Efficiency, Marginal cost pricing, Marginal cost, Multi-part tariffs, Ramsey pricing, Two-part tariffs, Fairness, Social policy, Distributional justice, Externalities, Contract regulation, Franchising, Service continuity, Service availability, Performance standards, Objectives

Case Studies

Economic Principles and Concepts as Applied to Municipal Water Utilities
Final Report to the Ontario Superbuild Corporation (project number SSB-018197), 2002.
GeoEconomics Associates Inc.

Electricity Tariff Structure Review: Alternative Tariff Structures: A Consultation Paper
CER/04/239, July 1, 2004.
NERA

Marginal Cost of Electricity Service Study
CER/04/240, July 1, 2004.
NERA

Final Determinations. Future Water and Sewerage Charges 2000-05: Periodic Review 1999
November 1999.
OFWAT

Setting water and sewerage price limits for 2005-10: Framework and Approach
Periodic Review 2004. March 2003.
OFWAT

Rate Rebalancing and Competition in Peruvian Telecommunications
Prepared for presentation at the International Telecommunications Society meetings held in Stockholm, Sweden, June 1998.
Rohlfs, Jeffrey H. and Arturo Briceño