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Regulatory Preferences and Two-Part Tariffs: The Case of Electricity.
by
Micheal C Naughton.
Presented by Julius Kimutai
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Introduction.
• The purpose of this paper is to develop and to demonstrate a method of deriving and testing regulatory preferences within and across customer classes.
• To assess the impact of this preferences on price structures and regulatory effectiveness in the electric utility industry.
• It employs Two-part tariff framework in the derivation of both intraclass(within customer class) and interclass(across customer class) preferences.
• As with optimal two-part tariffs, variable preferences are incorporated into a weighted social surplus function which regulators are assumed to maximize.
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1 . A m o d e l f o r r e g u l a t o r y p r i c i n g .
a. For residential customers(due to existence of income effects.)
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b. For no-residential customers (because of non-existence of income effects). The producer surplus of the regulated firm is defined as
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The Regulator’s Optimal Prices.
A. The weighted social surplus of consumer class i is given as:-
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B. The regulator is assumed to maximize the sum of the weighted consumer and producer surplus, prices are the solution to
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Using Ramsey prices
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E s t i m a t i o n o f Demand Elasticities.A demand model is developed and used to derive estimates of Kwh output and connection demand elasticities with respect to the per-unit and fixed prices for each customer class. These estimates are used to generate regulator’s Ramsey numbers and to develop second-best efficient and monopoly price structures in the section that follow.
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Sample Data and results.The models was fitted to 1980-cross section of privately owned electric utilities.
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Estimation results.
• All elasticity estimates in the table are significant except for residential class cross elasticities.
• The also found out that output demand elasticities w.r,t per unit price are consistent with a range estimates by Taylor and Bohi.
• But connection demand elasticities w.r.t to the unit price.However, it makes intuitive sense that is less elastic in the residential class as compared to industrial and commercial class.
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Regulatory preferences and price structures.
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Explanations
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Cntd.
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Summary and conclusions