1. Presented by: Fadhila MICHAEL C. NAUGHTON

2. Purpose  Develop and demonstrate a method for deriving and testing regulatory preferences within and across customer classes  Assess the impact of these preferences on price structures and regulatory effectiveness in the electric utility industry

3. Methodology  In order to derive the regulatory weights: A demand model is developed which extends the existing empirical literature on multipart tariff demand estimation to allow estimation of kWh output and customer connection demand elasticities with respect to both per-unit and fixed prices

4. The Regulator's Constituents I

5. The Regulator's Constituents II

6. The Regulator's Constituents III

7. The Regulator's Constituents IV

8. The Regulators' Optimal Prices I  To maximize weighted social surplus (W) where the surplus of each customer in class i is weighted by z i (h i ) and the producer surplus of the regulated firm is weighted by z u.  If z i (h i ) is increasing (decreasing) over q i, then regulators favor large (small) consumers within class i. If z i (h i ) is constant over q i, then regulators favor all consumers within class i equally  The weighted social surplus for customer class i is:  Differentiating with respect to P i and L i, it can be found that:

9. The Regulators' Optimal Prices II  To maximize the sum of weighted consumer and producer surplus  After taking the FOC, equations can be written as:

10. Ramsey Numbers and Price Structures I

11. Estimation of Demand Elasticities I

12. Estimation of Demand Elasticities II  Logarithmic transformation is appropriate for the following reasons: It implies that changes in prices affect the relative quantity demanded. This is useful, given that the purpose of this demand model is to explain aggregate demand across utilities. Using absolute prices and income on the right-hand side results in elasticity estimates which can vary

14. Data  The sample is restricted to those utilities whose service areas are contained within one state  All variables are electric utility service area specific  L i and P i are derived for each customer class by: The monthly fixed charge is defined as the difference between the total expenditure in the second lowest usage bill and what total expenditure would have been if all kWh output had been sold at the marginal price in this bill The annual fixed charge is then derived by multiplying by 12.

17. Regulatory Preferences and Price Structure I

18. Regulatory Preferences and Price Structure II

19. Regulatory Preferences and Price Structure III

20. Regulatory Preferences and Price Structure IV

21.  The average prices indicate that actual average prices in the residential and industrial classes are very close to their respective second-best average price  The actual average price in the commercial class is greater than the monopoly average price. Clearly price regulation is effective for non-commercial consumers, and goes a long way in reducing monopoly power in these classes

22. Conclusion  The results from the above application indicate that monopoly pricing, first-best efficient pricing and second-best efficient pricing can all be rejected  However, price structures tend to favor the residential and industrial classes over the commercial class and favor small users within the residential and commercial classes  The preference towards small users in the non-industrial classes may reflect a concern over equity, either derived from the regulators' own social welfare ideals or due to political pressures