Traditional Peak‐Load Pricing Theory: A Synthesis

The purpose of this note is to provide a short synthesis of what may be called the traditional models of peak‐load pricing developed by Boiteux (1949), Steiner (1957), Hirshleifer (1958) and Williamson (1966), and reviewed by Crew and Kleindorfer (1979). The elements of the analysis are familiar but all the main features and conclusions, hitherto arrived at by methods that differ slightly from one another, can be seen in one simple model. We will use here the example of a public electricity authority by way of illustration, assuming that the basic unit of electric power is 1 kilowatt (KW) and that the overall time cycle is 24 hours long. There is assumed to be a finite number of time periods within this cycle, each of which exhibits a distinct level of demand which is both constant over time and independent of the demand in every other period. Other main assumptions which are usual in this kind of analysis are mentioned below.