Two Essays on the Economics of Electricity Supply: 1. Has the Averch-Johnson Effect been Empirically Verified? 2. Electricity Pricing

This thesis reports on investigations in two areas of the economics of electricity supply. The first chapter examines empirical evidence to determine whether rate of return regulation has produced detectable overcapitalisation in this industry. The second chapter studies the determination of optimal pricing mechanisms for electricity, particularly in the presence of uncertainty. Chapter 1: Three studies which claim to confirm, and one which claims to reject, the existence of the Averch-Johnson effect in the electric power industry, have recently been published. This paper examines the general problem of what the nature of the A-J effect might be and what sort of data would be required in order to confirm its presence. The other studies are then critically examined on the basis of this discussion. A modification of the method used in one previous study is then used to test a suitably restricted form of the A-J hypothesis, and no evidence of capital bias is found. The principal conclusion of this study is that if the A-J effect is significant in distorting input choices in the electric utility industry, very different sorts of data than those that have been used thus far are going to be required in order to verify its presence. Mechanical usage of gross input and output numbers, without understanding of the technological processes involved, leads only to erroneous conclusions. Chapter 2: In this chapter we examine the issues involved in setting electricity prices. The existing literature on peak load pricing and pricing under uncertainty is reviewed. Recent technological developments applicable to metering and load management of electricity are examined. The pricing problem is then reformulated so that its solution may take advantage of these innovations. New technologies such as wind power promise to be economically attractive within this new framework. This formulation of the problem suggests a method of investment planning which would better distribute risk. In addition it provides a way in which the generation sector of the industry can be made competitive, thus reducing the need for regulation.