DISTORTIONS IN ELECTRICITY PRICING IN THE UK: REPLY
| Published date | 01 August 1985 |
| Author | G. K. Yarrow,M. D. E. Slater |
| DOI | http://doi.org/10.1111/j.1468-0084.1985.mp47003007.x |
| Date | 01 August 1985 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 47, 3 (1985)
0305-9049 $3.00
DISTORTIONS IN ELECTRICITY PRICING IN
THE UK: REPLY
M. D. E. Slater and G. K. Yarrow
Ian Jones' Comment raises a number of points, most of which we
believe are tangential to the central argument of our 1983 paper.
Nevertheless, the issues involved are of considerable importance for
electricity pricing policy, and we welcome the opportunity both to
comment upon them and to clarify some of the earlier analysis.
The first point we would stress is that our paper focussed on a
strictly limited question: given the CEGB's own declared policy of
long-run marginal cost pricing, and given the CEGB's own cost informa-
tion, was the Bulk Supply Tariff being constructed in a consistent way?
The second crucial point is that our approach was based upon the
standard economic definition of the long-run, i.e. all factors of produc-
tion are assumed to be variable.
All the points of principle derived in our paper follow from
these premises. We derived the conditions for cost-minimization, and
hence the appropriate expressions for long run marginal costs, from a
model with three plant types. Then we compared these expressions
with the CEGB's own procedures and found that there were a number
of significant deviations. Some of these deviations clearly had an eye
towards certain short-term realities, but they did not in themselves
amount to a consistent application of short-term marginal cost princi-
ples. We concluded that the BST was an unsatisfactory mixture of
(sometimes contradictory) long-run and short-run considerations, and
that it had parted company from its welfare economic foundations.
Jones accepts our theoretical analysis, and our conclusion that the
Bulk Supply Tariff is not derived from a consistent application of long-
run marginal cost pricing principles. He believes, however, that the
prices which do emerge from the BST are unlikely to produce a serious
misallocation of resources, and supports this view with a series of argu-
ments centred on four major issues:
(j) the implications of the relatively low net avoidable cost (NAC)
of retaining obsolete steam plant on the system;
the controversial nature of the estimates of the benefits of
nuclear plant;
the values of the relevant demand elasticities; and
the welfare significance of long-run marginal cost prices when
the generating system is not close to its optimal, long run configuration.
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