(A) study on priority pricing in congested markets with resumption priority considerations

Abstract

Traditionally, electric power service has been considered to be homogeneous and reliable. Recently, however, due to uncertainties in demand growth and the escalating costs of additional generation capacity, many utilities are becoming reluctant to commit capital to expand their baseload capacity. As a result, the reliability of supply can no longer be taken for granted and power shortages may eventually become inevitable. Confronted with this situation, priority service has emerged as a last resort of efficient allocation of scarce resources. Priority service is a special form of product differentiation in which a market is segmented according to the consumer``s preference to the quality of the product. Following Mussa and Rosen (1978), there have been a lot of studies on the product differentiation through consumer``s self-selection, especially in the context of electricity industry. This paper is on the welfare implications of resumption priority which has not been considered so far. Our major findings are, if we consider both interruption and resumption priority simultaneously, (i) there is another possibility of duration inefficiency, let alone the reliability inefficiency, (ii) if reliability inefficiency were to take place anyway, its magnitude will be smaller than that of interruption priority alone case and (iii) the interruption-resumption priority pricing is superior to the interruption priority pricing and interruption priority pricing to the uniform pricing, in terms of efficiency.