Pricing Schemes for Regulated Enterprises and Their Welfare Implications in the Case of Electricity

This paper examines the implications of implementing different pricing schemes--average cost pricing, two-part tariff, declining block, inverted rates--for electricity. A model is developed which can be applied to any public or regulated enterprise which maximizes welfare subject to a budget constraint. The model puts emphasis on deriving optimal pricing rules that balance efficiency and distributional equity considerations. It is found that welfare improvements resulting from lifeline pricing will most likely be of no practical significance, and that, contrary to what is generally believed, it is very likely that declining block pricing can achieve higher levels of welfare.