DECISION ANALYSIS APPLIED TO ELECTRIC UTILITY RATE DESIGN

The aspect of electric utility ratemaking, which deals with apportioning costs and structuring rates among customers, has been a problem for the electric utility industry since its inception. It has become increasingly controversial in the last decade because of the rapid rise in the nominal price of electricity. Prior research has determined that there is no one "correct" method of costing, but that the selection of a costing method depends on one's pricing or ratemaking objectives. Pricing objectives in the electric utility industry are multiple and often conflicting.;Next, the interrelationships among pricing objectives, costs, and rate design are analyzed under two assumptions: (1) that the economic efficiency objective is paramount to decision makers and (2) that decision makers desire to follow the traditional accounting costing methodologies in achieving that objective. By definition, however, economic efficiency depends on following marginal cost-based rates. A pragmatic solution of choosing an accounting cost method on the basis of how well it parallels the results of marginal costing is tested against the supply and demand data of synthetically created utilities. General conclusions are drawn on which accounting cost method would best meet the economic efficiency objective under different situations.;Basic policy findings from this research suggest that decision analysis can greatly improve the ratemaking process and that marginal costs and accounting costs results can be blended in a way to meet the economic efficiency objective.;The Analytic Hierarchy Process, a decision analysis technique, is used to address the problem of weighing priorities among pricing objectives. A normative model is developed for use by decision makers and national and regional preference values are determined. Such values afford an individual decision maker a reference standard for comparison purposes. Responses from various regions of the country are compared to determine sensitivity of pricing objectives to system operating characteristics.