Operationalizing Efficiency Criteria in Energy Pricing Policy

Abstract

This chapter addresses the question of how the basic economic efficiency rules of energy pricing can be translated into actual market prices, given that there exist important noneconomic objectives as well as practical implementation difficulties. First, it reviews the basic objectives of pricing and discusses the various trade-offs that may be necessary among them. Second, it discusses the problems related to short-run versus long-run marginal cost pricing. Third, it addresses the question of determining long-run marginal supply costs under conditions of economies of scale when potential market sizes differ. This is an issue of considerable practical importance in many developing countries. Fourth, it looks at the related issues of discriminatory and promotional pricing. Fifth, it analyses in some detail the practical questions involved in estimating depletion costs and the importance of the latter for determining minimum economic costs. Sixth, it looks at some of the problems of determining appropriate pricing for petroleum fuels. Seventh, it addresses some special questions related to the opportunity costs of funds which, in turn, determine part of the long-run cost of supply. Eighth, it looks at the reconciliation of economic and financial objectives and, finally, at the problem of dealing with inflation and relative price changes.