Efficient Pricing and Capital Recovery for Infrastructure over Time: Incentives and Applications for Electric Transmission Expansion

Classic economic theory provides a conundrum: different short- and long-run pricing prescriptions for large capital-intensive infrastructure projects. Short run prices should cover only the operating costs of the facility; otherwise, the project may go under-utilized. Only as the facility becomes congested are additional fees warranted to allocate its use efficiently. But capital costs are included in user-fees only when additional demand would force the construction of more capacity. Once built, however, the price should fall, resulting in schizophrenic behavior by customers and investors. By integrating the assessment and assignment of congestion fees with other economic principles like "peak-load-pricing" and the "inverse-elasticity" rule for apportioning capital costs, a sequence of pricing rules is described that can lead to a smooth, efficient and fair evolution of prices over space and time. These pricing principles also result in compatible incentives for all parties, and they complement several existing electricity system planning processes.