Marginal Cost Pricing in Practice

Abstract

In the late forties and in the fifties a number of French economists connected with Electricite de France were actively engaged in thinking about pricing policy and investment criteria. In contrast to most of their English speaking colleagues, who addressed themselves to their fellow economists, these Frenchmen were concerned to formulate proposals for practical implementation. Thus their work on marginal cost pricing led to the new tariff structure for high-voltage supplies introduced in 1957. Similarly, their work on long-term programming has been directly applied in formulating the investment plans of Electricite de France. In view of their practical importance and intellectual quality, it is extremely valuable to have a selection of these writings brought together and made available to a wider public. Professor Nelson has compiled a most interesting book. It contains, apart from his introduction, twelve chapters (some of them joint products) by a total of seven authors, Marcel Boiteux and Pierre Masse being the who have contributed the lion's share. Chapter 1 offers a bird's-eye view of the economic problems of Electricite de France; the next six chapters deal with price policy, including Boiteux's famous paper on peak pricing; chapter 8 is about the optimal management of seasonal reservoirs, and the last four chapters relate to the choice of investments. There is a certain amount of duplication between some of the chapters, but at least this reassures the reader that he faces a coherent body of doctrine and not a collection of unrelated pieces. In France, the unit-charge of the high-voltage tariff (the tarif vert) varies with time of day, time of year and geographically; in addition there is a peak kilowatt charge. This tariff, which reflects marginal costs, though of necessity only in an approximate way, is given its justification and has its derivation explained in chapters 2 to 7. Many of the complications in the exposition are necessitated by the mixed hydro/thermal character of French electricity supply. The following remarks gloss over these complications in order to concentrate on a key theoretical point in public utility pricing which has bothered a number of writers, namely the relation between longand short-runmarginal cost pricing. The authors' position, as stated by Boiteux, is that provided there is an optimal investment policy, short-term pricing is also long-term pricing and there is no longer any contradiction between the two (p. 70).