Peak-Load Pricing - With and Without Constrained Rate of Return

Abstract

We consider a public utility that offers its service at two different times. Capacity in place can be used in both periods. We study the effects of a change from uniform pricing throught the day to peak-load pricing, when the utility is constrained to operate with a fixed rate of return on capital. We show that therre are plausible circumstances in which the introduction of peak-load pricing reduces the price of the service both in peak and off-peak times. We show further that peak-load pricing can lead either to greater or to smaller capacity than uniform pricing. We are able to find simple expressions that determine the size and direction of each of these effects. We also provide a straightforward criterion for determining whether a particular individual gains or loses from peak-load pricing. Some of the results are extended under different assumptions about preferences, technology and market structure.Center for Research on Economic and Social Theory, Department of Economics, University of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/101092/1/ECON077.pd