Marginland: a magical place where costs disappear

The author argues that marginal-cost pricing, while very much a reality for many electric utilities at the present time by reason of regulatory fiats, should most appropriately be confined to the world of imagination, since that is the only place where it works. He contends that the forecasting of long-run marginal costs is patently impossible and the calculation of short-run marginal costs leads to revenue requirements that are unacceptable. Alleged marginal cost-based rate systems, the article shows, have been in reality only ingenious schemes for compelling industrial and commercial users to pay more than embedded costs for electricity and permitting residential users to pay less.