Public Utility Pricing, Investment, and Reliability under Uncertainty: A Review

Abstract

During the last decade, considerable work has been done to develop rules for optimal public utility pricing and capacity investment in the presence of uncertainty and/or nonhomogeneous technology; a variety of different results have geen obtained. This article reviews this literature with the purpose of reconciling apparent differences and synthesizing a consistent set of results. One of the principal contributions of this literature is that it emphasizes that the reliability of supply should be jointly optimized with prices and capacities. However, it is suggested here than an adequate framework for accomplishing this objective has not appeared in the literature. The specific weakness is in the measurement of the costs associated with supply interruptions. Finally, suggestions for improvements in the approach to optimizing price, capacity, and reliability are offered; important topics for future research are outlined.