Regulation and public utility pricing

This thesis studies the role of regulation in determining Ramsey prices, nonuniform prices and peak load prices. Chapter One examines increasing block structures. Conditions are stated under which such structures are efficient solutions to the bargaining game between consumers and the monopoly with the regulator acting as arbitrator. The study was motivated by the fact that data from Japanese utilities show they practice increasing block pricing in contrast to their American counterparts. A theoretically satisfactory justification for increasing prices is absent. Assumptions are made about the effects of capacity constraints on costs to justify the increasing block structure. Another model in which demand characteristics alone suffice to yield everywhere non-decreasing marginal prices as an optimal response is also presented. The welfare or profit maximizing schedule when a monotonicity constraint on prices is present coincides with the optimal solution to the unconstrained problem except on disjoint intervals where it is constant.;Chapter Three generalizes a peak load problem of Takayama. In his solution Takayama assumed differentiability of the demand function. But if the demand curve has kinks, the first order conditions for profit maximization must be restated. Using the techniques of nonsmooth optimization, especially the notion of generalized gradient, the existence of a pricing function for this problem is shown.;Chapter Four introduces the language of abstract resource allocation mechanisms into public utility pricing. The regulator of a multiproduct monopolist who enjoys a decreasing marginal cost function must choose between setting prices equal to marginal cost or imposing Ramsey prices. Which requires less information to communicate? The basis for the model is a theorem by Calsamiglia on decentralization in increasing returns economies. Since the notion of decentralization requires a finite dimensional message space we approximate the marginal costs and elasticities by piecewise linear functions. Within the resulting model it is possible to explicitly calculate the costs of communication of both pricing rules. It is shown, using information theory Ramsey prices cost more to communicate than marginal prices.;Chapter Two considers a block rate schedule as given and analyses the relationship with the inverse elasticity rule. A welfare maximizing model is also developed which, by equating marginal benefits across groups of consumers, leads to a declining block structure.