Marginal Costing for Electric Utilities: A NERA Course

Los Angeles, California
30 January 2008
Hosted By: NERA Economic Consulting

In today's world, with growing emphasis on energy efficiency and reduction of greenhouse gases, electric utilities need to know what their marginal costs are, both for pricing purposes and for strategic planning of all sorts, including implementation of retail access, profitability analysis, evaluation of demand-side options, design of incentive rates and special contracts, and development of marketing plans. Utility regulators need to use marginal cost information to evaluate the utility's proposals. Furthermore, the enactment of the US Energy Policy Act of 2005 requires regulators and utilities to evaluate the need for new time-varying rates and smart metering, programs that depend upon marginal cost information to achieve their efficiency objectives.

In response to these issues, NERA hosted the 2008 session of its Marginal Costing Course, now its 26th year, in Los Angeles on 30 January - 1 February 2008. Designed for utility and regulatory personnel who have some familiarity with utility cost analysis and/or pricing, the course is particularly useful for managers and staff in the pricing, cost-of-service, planning, marketing, and regulatory departments.

This year's course provided both theoretical background on estimating marginal costs and practical tools for applying the general costing principles in a variety of energy sector structures. Topics included marginal costs based on market prices; marginal costs of transmission and ancillary services; calculation of hourly marginal costs; new approaches to distribution cost estimation; and the effect of RTO rules on marginal generation and transmission costs. The instructors, NERA Affiliated Consultant Dr. Hethie Parmesano and Vice President Amparo Nieto, used numerous specific examples of actual marginal cost studies and challenged participants with numerical exercises to reinforce the lessons.

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