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.