Reliability and public utility pricing

Abstract

A model is used to explore the question of how to choose reliability levels under uncertainty and to expand earlier work by the authors and others. The basic problems of utility price setting to maximize either profits or welfare are examined and shown to change with the presence of reliability constraints. A rationale for these constraints is introduced as the cost of rationing under conditions of excess demand. Rationing is shown to induce the same optimal behavior for both the stochastic and the deterministic solutions. The analysis suggests that a coupling of rate-of-return regulations with specific reliability-level constraints will make regulation policies more viable. 19 references.