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Energy Conservation Through Rate Structure Reform: Electricity Rates Based on Marginal Costs

October 1976

Citation: 6 ELR 10221

Issue: 10

Barring the introduction of a radical new energy technology that will ease the use of fossil-fuel and nuclear-powered electric generating plants, energy conservation is both the most pragmatic method of reducing the adverse environmental consequences of electricity generation and the best way of assuring that the demand for electricity does not outpace our capability to generate it. It is generally conceded that new, less environmentally harmful energy technologies—such as solar, fusion, or geothermal—cannot be expected to assume a major portion of the nation's energy supply until the 1980s or later. Meanwhile, the "conservation ethic" inspired by the Arab oil embargo in 1973 has faded: current data show that electricity demand is now rising and that utilities may soon be caught in the pincers of rising use and inadequate supply.1

One incremental solution to this energy dilemma has recently attracted notice in several states and the Congress—the use of marginal costs in determining an electric utility's rate structure.2 Simply stated, the economic theory of marginal costs means "charging consumers a price which reflects the additional costs to the producer of an additional unit of consumption."3 Theoretically, if electrical energy were priced according to this principle, energy conservation would be promoted through the market structure, since the true costs, including the environmental impacts, of increasing electricity consumption would be reflected in its price, thus giving consumers a direct economic incentive to conserve energy.

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