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Ramsey Pricing of Electricity Under Unknown Bypass Costs

Abstract:
This paper derives Ramsey prices for the realistic situation in which bypass costs are unknown to both a regulator and an electric utility, in particular, to any useful level of precision. It is shown that the traditional inverse elasticity rule will still yield Ramsey prices that are incentive compatible. The Ramsey prices require relatively little information to implement, and we show the relevant elasticities to use. Modifications of these Ramsey prices that account for political realities are also provided.

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Energy Specializations: Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources

Keywords: Electricity, Ramsey pricing, bypass costs, electric utilities, regulation

DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No2-4


Published in Volume17, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.