Free Trial

Safari Books Online is a digital library providing on-demand subscription access to thousands of learning resources.

Share this Page URL

Preface - Pg. xv

Preface In my first book, Electricity Cost Modeling Calculations, I introduced an appro- priately specified multiple-output quadratic cost model that I developed in my dissertation and used it to calculate economies of scale, scope, and subadditivity for rural electric distribution cooperatives. But upon thinking about economic the- ory and the efficient pricing of electricity (or any other product), I realized that it was necessary to expand my work to estimating a cubic cost model, which yields properly shaped average and marginal cost curves from which optimal prices can be derived. In the case of electricity it is truly the case that an increase in the demand for power means that variable, and hence marginal, costs rise, as higher cost generators are called upon to supply power. And this should be reflected in the price paid for electricity. Figure P1 displays a total cost function, which is characterized by regions of increasing, constant, and decreasing returns to scale. This cubic form yields the average and marginal cost curves depicted in Figure P2. Only the proper specification of costs will facilitate the appropriate pricing of electricity that will truly incentivize producers to invest in new generating technologies and demand-side management and consumers to invest in energy efficiency and to become more conservative so that a real reduction in greenhouse