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8 Efficient Pricing of Electricity - Pg. 231

Chapter 8 Efficient Pricing of Electricity INTRODUCTION This chapter examines the various methodologies by which rates are set under regulation and the reasons that these rarely lead to a pareto-efficient outcome, which occurs when no one is made better off if someone else is made worse off. In fact, it is only by pricing at marginal cost, which is efficient both allocatively and productively (and maximizes welfare), that such an outcome results; this is the theme of this chapter. In addition, a new program being developed at the Electric Power Research Institute is examined. This program is all about under- standing the electric utility customer and is composed of two parts, one of which is an understanding of how various customer groups respond to different price signals. THEORY OF EFFICIENT PRICES