A regulatory pricing innovation in the electric power industry

In this paper, we provide a new pricing model which improves the regulatory incentive ness in the electric power industry. The model first invents a new concept of compensation cost which denotes the sum of the average cost of production and the subsidy compensated to the power enterprises for their hard working in decreasing the cost. Then, based on the average-cost-markup thought, we demonstrate that the maximum objective of social welfare the regulators pursuit equals the minimum objective of compensation cost. With the power enterprises' participation constraint and incentive compatibility constraint, we finally put forward the optimal scheme of the subsidy which stimulates the enterprises reducing the cost efficiently.