A RESPONSE MODEL AND ACTIVITY ANALYSIS OF THE REVENUE RECONCILIATION PROBLEM IN THE MARGINAL COST PRICING OF ELECTRICITY

The revenue reconciliation problem facing the electric utility industry today is that the revenues generated by setting the price of electricity at its marginal cost do not equal the "allowed" revenues as determined by allowing the utilities to earn a certain rate-of-return on historically valued assets. Depending on the amount of adjustment required and the reconciliation procedure employed, this problem can cause distortion in the price signal to consumers. The problem can also cause instability, and operational and financial fluctuations for electricity suppliers.; This dissertation analyzed the problem as a multi-goal, constrained optimization problem. Multiple goals of economic efficiency, equity, and price and consumption stability were maximized subject to operational and financial constraints. The objective was to find an optimal procedure for reconciling marginal cost-based electricity rates to a fixed revenue requirement.; Four generic adjustment procedures were analyzed using a computer-based consumer response model to electricity prices. The model simulated the kilowatt-hour response of income-differentiated consumers to alternative time-of-day pricing procedures. Each pricing procedure corresponded to one of the four revenue reconciliation procedures being analyzed. The consumption and revenue patterns that resulted were evaluated with respect to a set of criteria based on the multiple goals of the optimization problem. Alternative procedures were ranked on the basis of the weighted average scores they earned in the evaluation process. Weights were assigned to the various goals to indicate the preference ranking of the decision maker.; A computer program was designed to test different combinations of initial conditions, weighting factors, and constraint values. The response model determined the consumption and revenue response to each of the alternative adjustment procedures uner each of the test conditions. The highest ranking procedure was declared "optimal" for the test set of conditions, weighting factors, and constraint values.; The objective of the research was to determine if feasible reconciliation procedures exist that meet the multiple (and sometimes competing) goals of the electricity pricing problem while staying within the constraints of the problem.; The answer was that such procedures do exist. Selection among the alternative, feasible procedures depends on the weighting factors placed on the goals. One procedure did not universally satisfy all the goals; the various procedures satisfied the alternative goals to varying degrees. The selection process was sensitive to the initial conditions of the model and to the band width of the constraint boundary conditions.; Discriminate analysis was used to identify the variables that contributed the most to the optimal selection process. The results of the research indicated that the variables that are the most effective in selecting among the various procedures were the following: the ratio of peak to off-peak price, the amount of revenue adjustment required, the constraint on equity, the constraint on peak price stability, and the constraint on meeting the revenue requirement.; The policy recommendations that can be derived from this research are very relevant in light of today's energy problems. Time-of-use pricing of electricity is needed in order to signal to the consumer the true cost of electricity by season and by time of day. Marginal costs capture such costs and rates should be based on such costs. Revenue reconciliation procedures make marginal cost-based rates feasible from a regulatory requirement perspective.; This research showed that such procedures are available and selection among alternative procedures depends on the preference rankings placed on the multiple, and sometimes competing goals of electricity pricing.