^•*„,^.1>.C«^
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HB31
.M415
1
i
REGULATORY FAILURE, REGULATORY REFORM AND
STRUCTURAL CHANGE IN THE
ELECTRIC POWER INDUSTRY
Paul
No.
516
L.
Joskow
January 1989
REVISED DRAFT
January
25, 1989
REGULATORY FAILURE, REGULATORY REFORM AND STRUCTURAL CHANGE
IN
THE ELECTRIC POWER INDUSTRY
By
Paul L. Joskow
MIT
have benefited for comments from Doug Bohi, Frank Gallop, Peter Reiss, Martin
Baily and Cliff Winston. Financial support from the MIT Center For Energy Policy
Research, the Department of Economics Energy Research Fund, and the Olin
Foundation is gratefully acknowledged.
This paper was written while I was a
visiting scholar at Harvard Law School.
I
REVISED DRAFT
(3)
(brookings.end (rev) 1/25/89)
REGULATORY FAILURE, REGULATORY REFORM AND STRUCTURAL
CHANGE IN THE ELECTRIC POWER INDUSTRY
By
Paul L. Joskow
~~"
"
MIT
become
...Utility rate litigation has
Each contest
sport, a vent
monient,
then fuels the appetite for further fight. We shrink
from the thought of the season ending.... I am hard
pressed to imagine a more inefficient, haphazard
approach to utility rate making than our state has
witnessed in recent years...
Our Public Service
Commission presents an innovative and promising...
way out and we deliver a stiff left to the jaw.
for passions.
satiates for the
(Justice Robertson (Dissenting), Mississippi
Supreme
Court, January 4, 1989)^
INTRODUCTION AND OVERVIEW
In
the
deregulation
increased
include
past
the
role
financial
electric
power
utilities
are
still
changes
or
And
agencies.
have
the
structure
and regulation of the
the
increasing
the
resulting
regulatory
largely
unaffected
price
and
industry has
significant
At
gas
on
entry
yet
deregulation
in
that
are
of
surface,
the
the
Electric
experienced
by
state
the
other
and
dramatic
industries.
changes that have and are taking place
electric
de- integration
which
and
deregulation.
these
has
production
regulation
not
entry
industries
in
least
by
and
prices
natural
economic
virtual
a
power industry.
Of most importance
of competing wholesale suppliers of power to
gradual
changes
several
sectors.
followed
there
role
other
the
Nevertheless,
are
telecommunications,
and
of
resources
allocating
in
extensive
to
deregulation
partial
forces
been
has
subject
that
economy has gone through
U.S.
railroads,
services
industry
regulatory
structural
market
of
trucking,
airlines,
the
Complete
revolution.
transmission,
federal
decade,
the
electric
promoting competition
for
power
future
utilities
industry,
supplies
of
for
in
is
resale,
and
the
generating
-2-
by
acquired
capacity
for
utilities
resale
commercial
residential,
to
and
industrial
customers.
During
the
attracted
relatively
exhibited
a
formal
high
rate
and
little
attention
and
"voluntary"
smoothly
with
relatively
the
regulatory
rate
were
and
makers.
and
the
and
Major
and
structural
be
to
The
or
political
few formal
worked
system
numerous
While
on
few
prices,
performance
the
focused
proposals
industry
were
controversy.
in
The
real
there
norm.'
the
industry
regulatory
little
increases,
power
of
the
modest
relatively
more cooperation and coordination among
of
desirability
and
nominal
political
reform
policy
electric
policy
falling
for
file
regulatory
public
associated
reforms
scale.
public
performance,
to
the
1960s,
growth,
many of which were deemed
utilities
of
from
decreases
rate
little
the
government studies identified imperfections
academic and
industry,
had
rarely
hearings
of
financial
excellent
Utilities
most
productivity
of
rate
cases,
controversy.'
1950s
regulatory
too
small
were
reforms
on
high
not
economies
available
exploit
to
the
political
agenda.
Economic
growth
Productivity
profitability.
As
utilities
filed
for
filings
lead
formal
and
rate
1973,
costs
regulatory
for
by
supplying
and
regulatory
gradually
and
key input
result,
rate
the
in
to
Requests
exert
the
costs,
regulation,
for
state
These
resistance
to
and
rate
rate
largely
requests
rate
changes
for
increases
in
increases
these
and
and
interest
to
falling
These
increases
regulatory
followed
uncontrollable
higher
fuel
1970s.
commissions.
regulatory
for
early
growing number of
1970s a
resist
and
lead
costs
rising
their
larger
particular
in
and early
much
1960s
late
1960s
pressures
unanticipated
electricity.
political
in
groups to organize to
interest
large,
late
with
increased
and
by
fixed
prices
process
structures.
triggered
of
a
various
hearing
changed
disappeared
With
rose.
rates,
conditions
rates
created
changes that would deal with "the problems" caused
in
the
procedures
quickly after
increases
further
political
in
the
intensified
pressures
by rapidly
rising
-3-
performance
that
with
of
series
the
the
of
seeds
supplying
changes
and
Probably
the
were
the
in
taking
the
can
affecting
in
1980s
to
the
costs
of
how
prices.
performance
perceive
with
growing
the
development
of
importance
of
competitive
independent generating sector made up of power supply entities that
power
wholesale
distribution
to
and entry
for
utilities
most
markets,
resale
importantly
without
being
distribution
opportunities
utilities
first
wholesale
for
emerged naturally
trade
in
the
primary
capacity
in
generators
in
fuels
used
most
regions
(NUGs) was
reactions
of
the
that
occurred
in
the
competitive
the
sell
price
traditional
to
of
the
electricity,
then encouraged
with
regulations
state
political
utility/regulatory
traditional
past
fifteen
years,
the
structure
potential
to
unleashed
both
by
the
performance
the
prices,
non-utility
after
issued
1978 (PURPA).
to
PURPA
of
a
economic changes
opportunities
independent generating sector revealed by the
forces
the
as
generating
excess
unintegrated
of
by federal and
1980s
and natural gas
oil
combined
Entry
country.
and early
1970s
coal,
integrated
traditionally
accordance with the Public Utility Regulatory Policy Act of
The
a
generate
to
between
late
consequence of the unanticipated difference between
1980
subjected
a
regulations.
Increased
the
the
a
and
determined
1980s are associated
early
1930s.'*
electricity
in
the
to
been
not
early
1970s
the
changes
responses
and
historically
that
into
had
found primarily
be
during
collapse,
virtual
that
1920s
environment
translated
financial
utility
of
state
a
late
today
institutions
1970s and
power
the
responses
term
long
in
controversies
since
economic
be
to
was
long
led
and early 1980s, the system
1970's
late
place
utility
regulatory
increases
price
political
industry
the
important
problems that emerged
so
and
and
in
supposed
most
for
are
that
legislative,
electricity
the
utility
changes
of
By
regulatory
electric
regulatory,
to
smoothly
so
changes
the
interaction
cost
work
to
resistance
precipitously.
enormous
by
associated
The
decline
to
appeared
plagued
Regulatory
costs.
electricity
rely
more on
experience,
traditional
and
system
when faced with economic shocks and by PURPA,
changes
in
generating
electric
utility
and
arrangements,
encourage
increase
them.
generation
the
importance
the
generation
In
and
regulated partially integrated distribution
The
purpose
consequences
and
structure
early
in
of
the
"traditional"
of
the
changes
the
have
markets
generating
sector
regulatory
paper
and
examines
stimulated
purchases
the
in
the
with
power
to
electricity
making
sales
of
discussion
a
industry
as
it
of
and
regulatory
structure.
place
take
the
had
discussion
to
and
forces
in
on
the
in
This
that
have
then
leads
led
much more
development of an
growth
the
to
detail
independent
and
causes
nature,
brief
particular.
suppliers,
and
substantially
wholesale
to
the
to
these
the
of
a
likely
"traditional"
by
evolved
rationale
decade with particular emphasis
and evaluates
from independent
a
generally
in
likely
regulation
the
discuss
have begun
political
rapid
to
industrial
last
accommodate
of
suppliers
transmission
utilities.
begin
by
are
price
traditional
electric
that
power
wholesale
economic,
the
developments
major
seeing
practices,
to
for
and
acquisition
now
are
regulation
competing
is
I
followed
is
power industry
independent
of
of
overview
electric
changes.
these
This
paper
this
regulation
1970s.
performance
an
of
of
we
the
procurement
rate
these
by
govern
to
result,
capacity
independent
of
a
state
future,
unencumbered
service
As
capacity.
federal
in
arrangements
structural
new
of
operation
and
regulatory
alternative
demand
the political
increased
I
and
for
next
turn
structure
the
of
to
the
on developments
an
unintegrated
discussion
generating
the
The
rest
policies
that
changes.
public
of
sector,
utility
and the growth and importance of competitive
wholesale power markets.
THE STRUCTURE AND REGULATION OF THE ELECTRIC POWER INDUSTRY
a.
Industry Organization
Residential,
commercial and
industrial
customers (referred
to
in
what follows
-5-
collectively
Over
3,000
However,
between
Since
share
investor-owned
focus
many common
lOU
has
and
of
definitions
transactions,
As
etc.).
to
are
subject
utilities
also
take
of
as
customers
electricity
rates
serve
same
electric
is
entities
by over
100
generated
and/or
vary
widely
that
an
for
within
located
at
played
by
geographical
to
the
state
their
areas
an
is
de
within
reliable
service
in
extremely
at
distribution
Distribution
regulated
rates
to
What economists
think
of
retail
franchisees
phenomenon
rare
territories.
determination
the
Multiple
years.
by
commissions.*
territories.
role
little
charged
exclusive
facto
service
their
and
commercial
de
or
for
wholesale
transactions,
jure
rates
generation,
Appendix
the
residential,
regulatory
service
fifty
last
a
retail
provide
relatively
the
least
either
and
I
retail
to
customers
franchise,
obligation
Figure
The
1).
the
into
they
size,
Figure
(See
integrated
electricity
have
discussion
the
limit
I
characteristics
(See
retail
regulation
to
has
the
to
sector
distribution,
of
typically
exclusive
on
competition
the
rest
customers.
million
provided
is
1987.^
in
While lOUs vary widely in
vertically
electricity
distributors
lOU
the
regulatory
transmission,
service
this
utilities
on
is
been
of
utilities
provide
for
and
structural
generation,
franchise
retail
100
The
(I0Us)7
utilities
paper
this
distribution
customers
return
of
traditionally
industrial
all
supplied
electricity
and regulation of lOUs.
structure
transmission
In
over
to
retail
electricity
and ownership form.*
the
the
typical
the
at
on
billion
by nearly 3,000 publicly or cooperatively-owned
in size, structure
to
of
$150
over
spent
electricity
80%
and
75
private
distributed
here
distribute
entities
independent
customers)^
"retail"
as
authorized
today
in
to
the
power industry. ^°
lOUs
Historically,
transmission
and
customers.
As
early
joint
1970s
typically
distribution
the
capacity
average size
ownership
owned
of
and
required
of generating
generating
operated
to
serve
facilities
facilities
of
all
the
grew
operated
needs
in
the
the
of
late
generation,
their
retail
1960s
by one of the
and
owners
-6-
common
became
economically
owned
and
formal
power
the
between
pooling
are
defined
the
passage
arrangements
as
sales
by one
utility
the
Federal
Power
of
The
"coordination
sales
of
through
reliable
joint
contracts
that
operation
recent
resale
wholesale
1935,
in
utilities.
^^
transactions
Since
customers.
retail
to
been
have
transactions
exchanges
By
and
of
of
power
contracts.^'
generation
utilities
these
years
to
capacity
transactions
This
facilities.
encompass
category
virtually
purchasing
the
energy
pooling
and
and
capacity
arrangements,
large
transmission
These
utility.
of
lOU's
facilities
as
well
as
traditionally
in
longer
have
anticipation
and
transaction
bilateral
wholesale
provide for
to
both
involve
economy
and
loads,
economical
seller
to
capacity
their
wholesale
transactions
of
their
meet
voluntary
all
reasons
for
for
facilitate
to
possible
utilities
to
order
in
utilities
provided
traditionally
generating
"coordination"
of
integrated
owned by proximate
plants
sufficient
and
encompass the short term purchases
to
interconnected
is,
The
transactions.
"coordination"
so-called
do not involve an open ended obligation by the
"requirements"
including
of
term
in
by
in
That
ownership
short
expanded
emerged
of generating
use
purposes.^'
reliability
on
term
engaged
electricity
relying
encompasses
transaction"
make economical
the
Act
for
East,
economically
Wholesale
transactions.
facilities
the
in
and
reliability
owned by independent
another
to
of
operation
especially
increased
to
transactions fall into two broad categories.
category
first
term
has
enhance
to
wholesale
of
and,
utilities,
order
in
variety
a
Power Commission). These
needs
proximate
several
and
own.
their
led
also
exploit
to
on
facilities
have
planning
joint
small
too
by the Federal Energy Regulatory Commission (FERC, formerly the Federal
regulated
for
lOUs,
independent
make
also
generating
and coordination technology
generating and transmission capacity
lOUs
were
they
that
station
central
art
by
operated
found
utilities
transmission
in
interconnection
to exploit
of
state
Developments
many
as
and
short
reliability,
and
term
purchase
not
built
"stand-alone"
making
'coordination
of
sale
-7-
with
contracts"
transactions
of
generally
are
excess
to
holding
company
The
to provide service to
second
broad
"requirements"
transaction.
or
integrated
partially
ownership
demanded
by
area
vertically
customers)
or
municipal
selling
for
their
cooperative
or
utility
anticipated
the
FERC
regulated
by
by
regulatory
state
transactions
account
revenues. ^^
The
has become
wholesale
using
commissions
regulating
for
specific
within
coordination
principles
services
have
service
been
the
control
purchasers
similar
are
contract
a
heavily
those
used
requirements
5%
roughly
and
long
relied
are
to
Wholesale
rates.
medium and
power
requirements
(full
transactions
10% of lOU generation and
between
through
requirements of the buyer
Requirements
retail
a
the
requirements
a
of the "net"
all
fuzzy over time as
increasingly
supply
to
as
unintegrated
to
customers)
Under
cost-of-service
rigid
roughly
for
utility
to
provide
not
operate
generally
requirements
contract.^*
in
do
sufficient
utilities.
supply
the
fairly
distinction
contracts
of
public
or
lOU's
Most of these unintegrated
distribution
duration
currently
is
referred
is
integrated
which
which
(partial
to
by
sales
capacity
utility.
must stand ready
that
utility
transaction
companies
and
integrated
partially
to
transmission
integrated
distribution
wholesale
refers
customers
capacity
coordination
requirements customers.
of
distribution
retail
generating
integrated
its
type
This
and
generation
of a
an
by
wholesale
Rather,
utilities.
with
associated
needed
capacity
the
investor-owned
other
of
requirements
lOU
service
term non-requirements
upon
by
both
integrated
distribution utilities and unintegrated distribution utilities.
In
with
the
required
arrange
some
cases,
help
of
to
for
move
one
or
power
jurisdiction
is
is
more
from
or
transmission
power transaction and
FERC's
an economical
wholesale
third
buyer
wheeling
subject
limited.
to
It
transaction
parties
to
can
In
seller.
service.
the
that
control
these
jurisdiction
the
rates
only be consummated
transmission
the
cases
Transmission
exclusive
regulate
can
service
of
is
FERC.
charged
for
facilities
buyer
a
must
wholesale
However,
transmission
-8-
except
but
service,
such
provide
capacity
produced
by
was
over
25
percent
primarily
and
self-generation
fallen
3
the
percent
generating"
part
of
produced;
to
local
both
transmission
in
favor
and
of
the
(NUG)
the
capacity
generally
had
were
to
of
not
in
the
designed
to
provide
unintegrated
power
plants
needs
of
state
nor
built
independent
to
unaffiliated
federal
wholesale
power
abandon
to
had
self-generation
about
to
provide
to
where
the
additional
companies
owning
all
or
electricity
was
to
help
electricity
serving
utilities
for
other customers.
and
operating
provide generation service under contract to meet some of the
distribution
regulatory
utilities
policies
were
have
encouraged, their development until recently.^*
b. State
utility
Most of the "non-utility
exclusively
establishment
the
large-scale
production
electricity
U.S..
almost
built
1925,
as
power supply contracts
through
provided
supplied
"non-utility,"
were induced
long-term
domestic
from
of
their
power industry,
As recently
came
been
for
utility
to
cost
customers
negotiated
total
been
between
always
also
electric
U.S.
the
as
industrial
produced
needs
the
meet the generation capacity needs of proximate
Truly
the
alternative
in
electricity
relative
electricity
total
electricity
they
1978,
transmission
exclusively
almost
of
history
However,
individually
By
absolutely
has
electricity
attractive
most
fell,
of
utility.
early
supplied
plants.
of
to
voluntary,
cooperation
and large commercial customers.
electricity
power
industrial,
generation
with
the
utility
antitrust sanction.
establishments
economically
industrial
of
the
a
are
availability
historical
utilities,
commercial
During
an
many
for
electricity
and
the
loads,
by
production
to
arrangements
the
incentives,
order
cannot
it
transmission
and the threat of
recently).
self-generation
most
financial
utilities
industrial
(until
circumstances,
non-requirements
addition
In
use
and
serve
to
proximate integrated
own
Thus,
service.
regulatory
reflecting
extraordinary
in
and Federal Regulatory Processes
virtually
traditionally
non-existent
contemplated,
and
let
neither
alone
-9-
Public
authorized
sales.
terms
and
the
Retail
typical
distribution
generally
sales,
is
^nd
because
same
the
the
are
subject
states
also
before
review
electric
to
no
is
the
in
has
transactions,
receives
vast
bulk
integrated
data
or
A
date,
utility
any
enter
the
specified in
go
into
its
effect
entry,
FERC
industry.**
And
business.
no authority
and
of
regulation
utility
issue
to
This
bulk
retail
owned by
of
of
A
separate
utility's
a
majority
and
of
necessity
many
and
capacity
is
FERC's
and
terms
requirements,
if
the
of
the
conditions
of
case
convenience
public
authority
for
of
establishment
the
or
no authority
has
unlike
even
true
planning,
supply
certificates
transactions.
related
states
a
authorize
to
interstate
and
in
utility
is
facility
limited
interstate
uniform
gas
necessity
question
to
the
wholesale
system
of
utilities, etc.
Regulation of Retail Rates
must submit
proposed
ownership
the
Because
distribution
typically
convenience
of
The
from
and
authority. ^^
transmission
accounts, approvals of mergers between electric
b.l State
are
subsidiaries,
certificates
and
planning procedures.**
federal
filing
obtain
to
facilities
revenues
its
common
are
law.
state
transmission
regulatory
federal
generating
wholesale
rates
than
rather
new
(G&T)
power
bulk
through
by
assets
and
commissions.
utility
of
generation,
into
than
rather
public
and distribution
transmission
facilities.'"
in
of
regulation
utility
electric
to
power
engages
only
determined
utilities
major
utility
electric
also
state
require
FERC
pipelines,
are
and
utility construction
There
an
franchises
entity,
to
building
construction
retail
the
law
state
to
which they have
state
generation,
distribution
in
by
vertically
corporate
corporate
costs
of
states
regulated
are
rates
conditions
pursuant
organized
are
do business by the individual
to
make
companies
utility
changes
filed
tariffs.
or
disallow
to
state
its
in
the
commission,
level
or
in
structure
The Commission then may
them
in
whole
or
in
advance of their effective
of
either
part
its
existing
rates
as
allow such changes to
subsequent
to
regulatory
10-
A
review.'^
the
commission on
and structure of
level
proceeding
administrative
of
conditions
specify
cases
the
service
the
To
commission.
new
until
are
tariffs
adjustment
automatic
provide
example,
for
state
their
are
they
not
consistent
approved
called
rate
by
to
under
and
are
that
rates
more
use
of
fuel
progress
in
rates,
however,
the
development
rulemakings.
activity
state
by
define
details
of
In
state
of
last
restrict
for
criteria
in
few
legislatures
years,
have
also
power
purchased
however,
there
rates.
of
statutes
appears
well.
For
in
order
only
costs
They may
By and
etc.
defined
have
to
restrict
work
construction
provide
to
non-
that
regulatory
of
and
useful"''
specify
been
have
reviews
state
in
as
criteria
or
which
mandates
reasonable,
determination,
court
revise
to
and
cases
rate
tariffs
statutory
specific
inclusion
procedures
law,
case
rates
in
approved by
are
certain
"just,
rates,
the
base
rate
regulatory
regulatory
the
clauses,
approved
in
large,
through
the
decisions,
and
been increased
more "guidance"
to
commissions, however.
The
electricity
utility
or,
adjustment
The
and non-price
price
must be "used and
facilities
incorporated
be
to
law.
some
vague
fairly
elaborate
that
state
between
But
fuel
with
as these input prices change.
set
may
for
to
tariffs
fixed
are
commission.
the
generally
is
new
until
prices
utility
the
in
change
the
Tariffs
which have been "prudently incurred" may be included
the
order
cases.
must charge
operate
statutes
costs
are
approximation,
first
may provide
associated
also
move up and down
State
law
can
if
utility
commission
the
discriminatory."
a
commissions
state
that
made
provisions,
expenses, so that prices
Most
initiative
which proposals for changes
in
that
a
rates
its
are
prices
own
its
as
basic
rates
a
cost
is
whole,
alternatively,
average
principle
so
that
that
prices
prices
are,
that
of supplying
the
it.
currently
should
in
theory,
average
guides
reflect
set
revenue
state
the
so
per
that
"cost
total
unit
commission
of
regulation
For
service"."
revenues equal
of electricity sold
For specific services provided by the
total
the
costs
equals
utility
of
(such
the
as
-n-
times
and
commercial,
residential,
day)
of
prices
industrial
generally,
service
theory,
in
the
reflect
and
seasons
different
in
providing
of
costs
different
at
the
individual services based on a variety of different cost allocation schemes.
Commissions
and materials) and
theoretically
capital
power purchased from
from the
a
past
capital
in
this
accounting
system
if
investment
century
are
estimate
of
stock
depreciation
"rate
estimated
fairly
While
base".
on the
set
depreciation
to
easily
plus
a
cost
quantity
latter
is
of
this
utility's
employed, with asset lifetimes that are
is
costs
in
year"
is
the
return"
"fair
utility's
to
to
original
which
cost
of
Straight-line
base".
"rate
earlier
by multiplying an
quantity
by the depreciated
the
"test
on
return"
"fair
directly
of actual
future
a
if
obtained
was considerable debate
there
capital
called
and the costs of
be
basis
method for computing the
proper
nominal
utility's
This
assets.'®
or
are
rates
can
purchases)'*,
labor,
(fuel,
costs
materials
labor,
most commissions now obtain
entitled,'^
the
equal
the
to
be
is
cost
as
can
they
or
Capital
utilities
its
(wholesale
year,"
employed.
Fuel,
parties
operating
both
that
covered.
are
costs
so
third
utility's
"test
rates
set
some extent arbitrary--and
thus the subject of debate from time to time.
approach
This
continuously,
present
cost
value
of
the
investment
incentives
or
equal
according
equal
then
the
to
these
the
book accounting
its
to
of
is
of
capital
alternatively,
invest
(present
also
ratemaking
the
market value of a
cost value of equity.
so
that
if
that
the
of
rate
utility
common
are
equity
flows
a
utility
greater
its
cost
exactly
than
charged
being
continuously
will
its
approach provides
from
earns
as
and
original
the
on
return
cash
consumers
rates
exactly
this
has
that
asset
rate)
theory,
in
protects
utility's
each
of expected
value
case
formulas
expected
Thus,
and
cost)
for
exactly
applied
if
discount
the
the
of capital.
would,
cost
earnings
as
cost
investment
It
capital
stream
a
cost
Or
utilities
initial
determining
utility
asset.'^
profits.
to
the
(using
for
to
monopoly
exactly,
is
give
to
adjusted
of
capital
equal
the
-12-
There
could
be
used
return
on
investment
of
virtues
the
inflate
incentive
is
capital
the
capital
equal
type
and
primary
used
verification
of
artificially
to
designed
disadvantage
charged
rate
retail
of
particular
been
has
that
ease
(b)
The
from
(aside
any one point
at
in
economic cost or rental rate associated with
true,
point
that
at
the
or
cost
the
transfers
asset
The
chaining).
(daisy
that
of
of capital.
that
expected
the
that
cost
of
simplicity
deterrence
property
the
utility's
ratemaking
accounting
(a)
and
generally
not
firm's
the
cost
base
effects)
does
original
the
to
have
formulas
accounting
cost
capital
which
purposes
equal
costs
rate
possible
exactly
is
primarily
are
investment
actual
time
ratemaking
for
depreciated
traditionally
many
course
of
are
accounting
time;
in
and
economic
ratemaking
principles
capital
costs
carrying charges are equal only by chance at any point in time.'*
exactly
either
ratemaking
through
worth
time
as
or
the
company
hearings.
commission
unchanged for years
referred
of
to
by
earned
electric
return
increase
profits
were
rates
"regulatory
as
at
may
adjusted
costs,
so
on
only
commission
the
of
during the
1950s and
1960s for
slowly
Due
be
to
filed
changes
to
regulatory
Moreover,
when
prices
all
may remain
tariffs)
some
actual
frequently
is
of
are
rates
fixed,
return
utilities
would be no such incentive
costs
The
utilities.
costs
incurred
by
a
the
lengthy
often
held
in
of
commission-determined
the
that
prices
the
below
there
adjust
lag,
above or
while
utility
motion
the
has
provisions
adjust
electric
continuously
not
the
instant.
by cutting
continuously
to
do
of
features
practical
changed
are
after
precisely,
lag."
utilities
any
and
did
the
as
regulated
of
rate
more
(or,
important
Rates
simple
these
commissions
First,
change.
costs
Prices
tendency
noting.
follow
not
Two
continuously.
or
are
does
regulation
practice,
In
utility
if
fair
can
prices
would
be
recovered at every instant.
Second, commissions are
by
regulated
firms.
Regulators
not
bound
have
the
to
set
rates
authority
to
that
cover
'disallow'
all
costs
both
incurred
capital
and
-13-
operating
were
"imprudent"
disallow
have
certain
at
While
with
consistent
a
Constitutional
more
of
effect
commission
a
because
inefficient
cheaply
the
guarantees
was
utility
did
or
not
could
require
those
regulatory
to
define
the
application
of
these
rules
against
the
taking
of
for
units
can
it
flexible
considerable
has
the
the
that
principle,
In
expenditures
associated
the
that
useful."
services
state
apply,
will
it
and
believes
it
find
they
if
"used
corresponding
the
all.
that
rules
if
utility
a
not
are
or
costs
obtained
services
by
incurred
costs
must
be
property
private
without just compensation.'*
addition
In
for
(prices
structures
commissions
also
equipment;
supervise
sometimes,
These
non-price
terms
and
necessity
deeply
customers
and
conditions
and
allow
to
supply
in
of
quality
approve
mergers
planning
side
as
line
issue
attributes;
new
of
and
rate
services),
such
service,
addition
the
and
sold)
different
much more from
vary
regulation
all
and
service
and refranchising;
involved
of
attributes
price
of
procedures,
franchising
get
classes
billing
convenience
of
(average
levels
other
establish
certificates
rate
specific
requirements,
extension
and,
setting
to
plant
and
and acquisitions;
operating
to
state
issues.
state
that
does the basic structure of price regulation.*"
(FERC) Regulation Of Wholesale Rates
b.2 Federal
very
Until
of
wholesale
wholesale
become
with
associated
driven
another to
and the
required
transactions
coordination
increasingly
market
recently
to
transfers
not
make
seller
a
is
the
has
to
regulatory
been
"accounting
regulatory
of
proximate
and
of
negotiate
the
sell.
contracts,
driven
buyer
as
is
Although
this
has
integrated
sellers
transactions
utilities
are
with
one
compete
under no obligation
sellers
frequently
have
been
for
has
this
utilities,
coordination
between
regulation
However,
service".
Wholesale
service
to
of
FERC
governing
unaffiliated
capacity
utilities;
under no obligation
cost-justify
cost
fiction.
energy
cost
principle
between
transactions
accounting
sales
basic
to
generally
buy
been
accomplished
14-
through
the
FERC
staff
ex
post
unencumbered
by
This
between
contracts
the
rigid
approach
development of an active wholesale
built
facilities
temporarily
serve
to
excess
accounting
rules
the
and
been
for
energy
expected
requirements
needs.
Cost
these
to
market
has
lengthy
of
loads
of
capacity
the
would
have
facto
set
retail
with
which are
but
on
based
made
the
associated
seller
regulation
service
reviews
regulatory
and
to
de
encouraging
for
critical
satisfactory
used
are
that
decade,
past
are
that
utilities
principles
the
mutually
accept
to
integrated
accounting
cost
regulatory
flexible
willing
increasingly
Over
mechanisms.'^
allocation
cost
been
has
coordination
negotiated
rates.
of
variety
a
cost
rigid
of
evolution
the
such a market almost impossible.
FERC
between
allocations
ratemaking
service
setting
and
principles
made
is
very
are
that
An
similar
upon
the
on the system, including peak load, voltage
A
factor.
depreciated original cost rate
depreciation
taxes, etc. are
This
Utility
lOUs
charge
under
coordination
didn't
even
state
the
same way
and
federal
Company Act
that
wholesale
developments
much
in
entire
Holding
integrated
"captive"
added
are
of
requirements
affecting
PURPA
the
and
transactions
contemplate,
the
(see
has
evolved
FERC
taken, and
is
in
respective
their
O&M
in
the
and
regulatory
FERC
regulatory
from
Aside
never
rules
small
flexibility
context
of
service
to
the
load
costs,
that
Public
vertically
retail
relatively
has
and
accommodate
evolved
until
and
recent
producers
p>ower
developed,
to
the
(including
business of providing
cogenerators
implicit
explicit
of
Fuel and non-fuel
structure
regulatory
the
below),
states
between
costs
which power
at
the
as they are at the retail level.
customers.
prices
cost
nominal cost of capital, and straight
base,
1935)
primarily in
by
used
characteristics
used to determine capital costs.
are
those
to
of accounting
allocation
based
approves
and
service
companies using embedded cost of
holding
interstate
customers.
retail
jurisdictions
retail
loads
line
for
rates
of
affiliates
requirements
wholesale
for
rates
sets
can
for
recently
unintegrated
-15-
contract
unaffiliated
lot
of
generating
build
to
power producers which would compete with one another
wholesale
("stand-alone")
distribution
encouraged
neither
historically
generating
competition
facilities
in
a
under
sale
FERC
wholesale
to
I>espite
regulatory
a
policies
investments
entrepreneurial
competitive
contract
power markets.
markets
accommodated
service
for
wholesale
wholesale
in
nor
provide
to
power
produce
competitive
in
utilities
about
rhetoric
and
plants
to
in
market.
generation
THE RATIONALE FOR AND THE PERFORMANCE OF THE "TRADITIONAL" SYSTEM
The
appropriate
discussion
and
economies
of
the
primary
debate
to
a
of
transmission
functions,
geographical
areas;
electricity
for
an
a
electric
transmission
level
firms.
viewed
the
savings
natural
is
Regulated
efficient
are
as
integrated
monopoly
response
production
do
we know about
integrated
That
over
between
serve
competition
with
separate
single
to
provide
is.
the
monopoly;
even
larger
generation
distribution
a
retail
and
utility's
Thus, the "optimal" organizational form
well.
completely
of
monopolies
scale,
provide
to
natural
a
is
integration
required
vertically
regulation.
area
of
integration
of
the
academic
of
economies
of
franchises
price
to
natural
vertical
generation
institutional
firm
subject
incompatible
a
monopoly
geographical
of
monopoly
with
or
the
emergence
promoting
subject
the
combination
the
legal
defined,
economies
make
utility
competing
cost
and
effectively
efficiencly
as
broadly
for
area,
any
in
for
and economies of vertical
facto
geographical
specific
load
de
been
has
The
years."
rationale
with
firms
environment
regulatory
electricity
production,
interest"
distribution
transmission
many
for
"public
of
pricing
multiproduct
supply
electricity
service
and
production
efficient
and
structure
to
without
generation
the
the
at
distribution
sector
distribution
made
utilities
are
up
or
of
then
obtain
the
perceived
costs
of
monopoly
characteristics
of
electricity
desire
incurring
to
the
pricing.
What
the
natural
monopoly
16-
and the performance of regulated integrated
supply
"public
evidence?
It
(encompassing
have
rationale
interest"
the
for
acknowledged
generally
is
monopoly
natural
and
are
of scale at the generating unit and plants levels
economies
multiplant
facilities
meet
to
demand
and
loads
signal
to
with
customers
retail
not
in
of
whose
product
a
be
to
generating
dispersed
for
reliability
prices
electricity
There also appear
and where an economical
storable,
spot
transmission
some economies
least
at
coordination
maintain
to
widely from hour to hour,
varies
technology
fluctuating
economical
with
associated
clearly
the
Is
en.pirical
of
functions)
well.'^
as
the
and
distribution
reliability
There
characteristics.*^
with
consistent
the
that
coordination,
transportation,
system
traditional
monopolies?''
electricity
not
is
available
balance
to
supply and demand in real time.
The
however,
more
is
and
transmission
while
of
extent
and
cost
economies
distribution
investment
technical
components of
electricity
transmission
utility
on
uncertainties
significant
costs
decentralized
result,
of
(time
the
economies
(vertical
both
supply
with
associated
and
generation
conventional
demand
and
has
common
with
In
associated
with
areas,
economies
an
that
there
ownership
addition,
AC
issociated
investments
through
systems
been
load
of
because
of
are
likely
generation
network
horizontal
of
there
three
and
generation
supplied
by
a
and
etc.),
may
there
that
in
and
these
factor,
bilateral
economies
transmission
with
suggest
sides,
efficiently
transmission
between
products
the
reliability,
level,
linking
wisdom
integration).**
geographical
voltage
of
nature
generation,
segments,
three
characteristics
the
level,
processes,
separate
interdependencies
Furthermore,
about
talk
these
into
firm
the
at
se
to
completely
broken
often
multiproduct
the
the
were
economical
supply.
common
is
it
per
generation
in
they
if
are
and
delivery,
associated
reliability
as
data
investments,
scale
While
controversial.
important
are
of
be
and operations of
As
contracts.
to
and
be
important
transmission
coordination
extend
integration,
a
over
or
and
large
extensive
17-
between
cooperation
likely
be
to
recognize
in
are
system
the
effects
are
In
significant
have
time
real
consequence
a
regard
this
of
of
and
free
or
interconnections,
and
laws
physical
not
are
to
behavior
rider
interconnected
demand
at
AC
interconnected
an
are
important
an
of
pieces
throughout
capacity,
especially
is
it
individual
effects
transmission
externalities
generation,
in
and
generating
potential
operation
changes
network;
of
well.
as
decentralized
power
electric
These
there
with
associated
point
significant
that
owners
proximate
any
system.
with
coincident
ownership boundaries or contractual transmission paths."'
believe
I
the
distribution
implies
that
service)
by
While
of
electric
distribution
of
of
electricity
competitive
important
natural
monopoly
be
to
distribution
public
service
some form of
to
growth
of
suggests
for
serve
the
As a
continues
customers
(retail
to
regulation.
price
competition
for
customers,
geographical
areas
provided
paper
this
by
or
I
in
the
been
has
there
competing
in
least
This
encouraging
result,
be
to
regulation
wholesale
same
very
the
at
characteristics.
subject
industrial
in
that
final
to
possibilities
interest
prices.
price
companies
large
policy
to
distributed
of
discussion
electricity
retail
evidence
especially
electricity,
distribution
subject
be
to
empirical
continue
monopoly
contemporary
serious
has
should
continues
of
available
electricity
electricity
there
deregulation
the
of
franchised
distribution
little
the
that
suppliers
broad
in
assume
that
monopolies
franchised
and focus on changes associated with the
power
markets
and
generally
an
independent
generation supply sector in particular.
As
changes
that
(lOUs)
that
I
discuss
have
and
suppliers
provide
the
more
detail
below,
we
are
seeing
structural
and regulatory
would increase opportunities and incentives for investor-owned
transmission
to
in
requirements
historically
generation
of
of
been
integrated
vertically
electricity
to
rely
more
into
on
the
competing
distribution,
third
them with long term supplies of generating capacity
their
retail
customers
when
these
sources
are
utilities
to
party
satisfy
more economical
•18-
than
utility-owned
monopoly
the
that
generating
and/or
benefits
These
between
arrangement
integrated
with
current
competitive
wholesale
of
properties
economical
system should
between
tradeoffs
of
regulated
arrangements
etc.)
horizontal
relying
associated
far
in
too
believe
in
fact
with
that
and
consumers,
the
through
of
are
What
What
with one another?
efficiencies
of
the
associated
"second
of
properties
cooperative
the
with
associated
inefficiencies
arrangements,
theoretical
the
institution
of
associated
issues
about
questions
really
segments
three
these
organizational
and the development of
with
associated
arrangements.'"
which
of
fundamental
generation
between
integration
efficient
most
other
to
most
the
integration
vertical
horizontal
the
are
some
order
more on comF>etition
are
or
pools
so
including
indirectly
that
Probably
potential
What
sacrifice
integration
I
there
(power
might
that
the
view
imperfections
through
potential
monopoly?
customers
the
markets
integrated
and
companies
distribution
retail
regulated
cost,
final
to
given
organizational
form
the
affect
de-integration
generation
be
efficiently
represents
electricity
toward
organization
economic
total
service
conventional
the
plants
alternative
the
reflect
be
to
utility's costs.
monopoly.**
trend
continue
rates
retail
transmission/distribution
supplying
regulated
will
changes
these
generating
for
that
electricity
challenge
and
generation
the
of
costs
changes
interconnected
supply
providing
on the distribution
their effects
prices
distributor's
of
costs,
Assuming
capacity.
of
the
electricity
nature
the
is
the
best"
bilateral
efficiencies
of
of
the
monopoly
integrated
with
most
the
is
the
institution
organizational
contracting,
vertical
and
reduce some of the inefficiencies of regulation by
to allocate generation resources?*"
from a purely technical or engineering economics perspective
important economies of scale and economies of vertical integration
the
many
supply
of
electricity.
utilities
transmission/coordination
in
the
involved
United
Indeed,
in
States.
from
this
generation
However,
perspective
and
how
there
are
(especially)
these
technical
-19-
struture
for
the
and
statically
efficiency
Given
of
cost
As
a
on
focused
great
a
regulatory
and
regulatory
processes.
it
only
is
natural
and
costs
in
practice.
passes
that
and
consumers
costs
the
provide
from competition and subject
hypothesize
to
efficient
or
(first
they
that
regulated
the
that
regulatory
minimize
way
a
to
insulated
from the most
depart
face
they
rates
second-best)
are
prices.
of the scholarly analysis of the electric power industry has
deal
of
effects
the
are
in
on
performs
it
regulation
to
rates
set
production
utilities
minimize
to
may
charge
result,
electric
subject
regulators
firm
regulation
incentives
to
Do
firms
how
on
and
industry
optimal
the
depends
industry
single
that
service
diminished
allowed
of
benefits
about
monopoly
dynamically?
consumers?
to
power
electric
integrated
vertically
I>o
views
ones
influences
characteristics
changes
structural
Most
on
regulation
of
reduce
to
this
and
costs
literature
inefficiencies
has
examined
caused
by
prevailing
and
elsewhere*^
discussed
is
and
prices
will
I
provide only a brief selective summary here.
By
interacts
not
and
large
with
minimize
studies
current
the
between the marginal
of
the
biased
is
toward
biased
the
of
structure
neoclassical
examined
the
sense
the
find
industry
that
that
regulation
electric
minimization
cost
Some
prices.
of
fuel
or
labor
At
inputs.
as
one
and the
ratio
electricity
that
for
looks
study
do
equality
Other studies find that
least
it
utilities
implies
evidence
find
studies
toward the use of capital inputs.
use
of
effects
of transformation of one input for another
rate
input
associated
production
the
in
costs
have
that
it
is
and
finds evidence of "X- inefficiency" as well^'.
The
study
to
uncertain.
long
run
capital
nature
These
facilities
magnitude
however.
study,
cost
and
a
these
inefficiencies
static
Furthermore,
the
accuracy
must
rely
on
necessarily
studies
functions,
of
questionable
undertaking
ex
for
of
ix)5t
an
varies
the
cost
results
data
industry
and uncertain and changing input prices and demand.
from
widely
to
with
very
is
estimate
long-lived
There
is
also
-20-
much
the
indicia
work
variation
real
less
are
that
in
state
used
typically
environments.
regulatory
similar
does
literature
with
associated
and
inefficiencies
know
these
if
a
supply
of
reliability
of
and
not
some of
in
Empirical
regulation.
in
the
inefficiencies
are
results
very
that
inefficiencies
of
causes
the
we do
Furthermore,
uncertain.
magnitude
of greater
are
and
magnitude
the
under
believe
I
some
are
there
performance
While
arrangements.
that
electricity,
compare
to
exist
regulatory
presumption
support
the
do
E>ata
fundamentally different structural
not
variations
reflected
is
based on data for firms that have very similar structures and operate in ery
is
the
up
pick
to
than
procedures
regulatory
would be found by
than
applying the same techniques to unregulated industries.
Studies
close
rates
examine
that
the
to
of
cost
service
late
1950s
and the
1960s
regulatory
on
investment
greater
than
their
throughout
and dynamic
static
better
exactly
costs
that
than
off
try
to
this
cost
period
of
However,
and continuous.*'
that
lag
worked
below
the
suggests,
that
electricity
I
utility
to
cost
because
this
regulatory
increased
in
lag
the
am
not
and
and
costs
lag
returns
prices
encourage
can
were actually
match revenues and
aware of any empirical studies
As
1970s.
to
tried
During
earn
to
customers
that
was "optimal".
1970s
the
in
I
real
regulatory
conceivable
is
it
utilities
Since
capital.
and
time
minimization,
nominal costs changed dramatically
supplying
of
cost
allow
to
keeping
in
conclusions.
consistent
fairly
worked
lag
regulation
rate
state
would have been had regulators
they
show
yield
also
the
declined
of
effectiveness
the
the
early
The
of
real
and nominal
real
1980s
pattern
(see
below)
costs
and
of
regulatory
keep prices below the accounting cost of service and earned returns
of
believe
Some
capital.**
correctly,
incentives
to
that
invest
the
in
of
the
work
regulatory
new
focusing
process
generating
had
on
the
latter
become
capacity
under
so
period
punitive
prevailing
regulatory arrangements had been sharply diminished.*'
To
the
extent
that
there
is
any general consensus that can be drawn from
-21-
scholarly
the
toward
largely
structured,
to
the
performance
the
aimed
reforms
regulatory
to
guard
on
literature
of
desirability
developing
inefficient
production
and
horizontal
mergers,
deregulation
of
consider
any
in
and
entry
way
detailed
even
or
markets that are now taking place. *^
the
difficult
that
issues
arise
and
than
few
a
is
it
AC
producers into a synchronized interconnected
the
dimensions.
The
next
leading
in
In
The
wholesale generation markets in
Figure 2
lOU
the
medium
utilities
and
than
the
sale.
the
was
it
obviously
at
also
East
the
have
and
with
other
to
side
West.
for
Thus,
follow
of
due
and
forces
are
that
changes taking place
development
we can
1
engaged
energy
and
between
increasing
than
I
refer
see
of
competitive
with
drawn
is
is
the
another
relying
lOU
lOUs,
domestic
trade
The
Evolving
obvious
changes.
as
involving
transactions
capacity
2
to
several
wholesale
in
transaction
sales
rather
the
important
several
detail.
the
to
in
political
discuss
the
As Figure
ago.
contract
expanded
that
Figure
heavily
years
and
diagram of what
schematic
2
changing
is
regulatory
processes
contracts
fifteen
addition
In
transactions
term
overview of the nature of those changes.
much more
much more
is
long
but
both
a
By comparing Figure
lOU."
First,
contains
an
sections
procurement
generation
lOUs
economic,
the
UTILITIES:
of
provide
I
examines
changes.
these
utility
regulation
section
this
section
to
and
structure
power
pyower system.
THE CHANGING STRUCTURE AND REGULATION OF ELECTRIC
OVERVIEW
The
with
dealing
for
not
power
wholesale
in
for
does
literature
decentralized
integrating
efficiently
in
prescriptions
helpful
particularly
are
cooperation,
increased
changes
the
prices
mechanisms
incentive
simple
to
points
it
electricity
to
exceptions,
anticipate
Nor
way
the
regulatory
better
rather
power industry
electric
decisions,
With
prices.
the
improving
at
against
coordination
of
with
lOU
a
is
that
these
Canadian
on wholesale
integrated
other
is
buyer,
making
wholesale
utilities
transactions
in
with
-22-
proximate
with
generating
excess
contracts
allow
to
uneconomical
trade
primarily
utilities
other
involves
utility's
requirements
we
reflects
see
and
prices
capacity
was
that
The
emphasize,
built
effort
capacity
from existing generating capacity.
to
meet
to
exploit
to
The capacity
the
and
utilities
term
long
or
displace
to
however, that most of
trade
that
relative
fuel
supplying
of
with
associated
in
electricity
was not
trade
this
this
integrated
wholesale
differences
cost
an
of
needs
the
inter-utility
in
minimize
to
medium
additions
capacity
increases
an
primarily
generating
excess
want
I
customers.
defer
to
utilities
purposes,
reliability
signing
increasingly
are
capacity.
far)
(so
term economy and
short
capacity
generating
date
to
for
generally built explicitly to serve unaffiliated buyers in the wholesale market.
The second change
1
introduction
the
is
referred
to
cogeneration
treatment
subject
type
of
internally
the
new
"IPP"
(see
categories
suppliers.
production
paid
are
supposed
service
made
|>ower
few
are
seller
that
I
reflect
offered
More
generation
of
suppliers
QF
refers
to
qualify
for
special
term
rather
to
will
the
discuss
than
utilities
importantly,
QFs
in
more
the
from
supplier's
QFs
utility)
are
(plus
has
expected
are
not
presently,
the
cost
of
cost
QF
of the
service.
power
increased
to
regulatory
entities
detail
service
independent
opportunity
purchaser's
reduce demands on the
to
years.
The
facilities
As
to
available
of
These independent generating
below).
of service regulation.
by the
last
and
PURPA
generation
of
Supplies
in
cost
to
two
of
and small power
under
they
prices
"QP
as
by the differences between Figure 2 and Figure
reflected
used
significantly
contribute
a
large
fraction of future generation requirements over the text ten or twelve years.
The "IFF
category
refers
explicitly
their
long-term capacity needs.
cost
of
service
unaffiliated
utility
"stand
alone"
producers
supply power to unaffiliated distribution
built
to
to
or
profit
buyers
in
of
utilities
generating
to
service
meet some of
These producers would not be subject to traditional
regulation,
competitive
but
rather
generation
would
markets.
negotiate
IPPs
contracts
differ
with
from QFs
-23-
in
PURPA's
power
ways.
technology,
of
plants
depend
procurement
compared
that
the
and
practices
they
meet
stand
alone
that
simply
be
would
there
no
be
special
Whether or not they do so
from IPPs.
regulatory
environment
advantages
that
ownership
integrated
traditional
to
federal
economic
the
Second,
purchase
and
state
They would
choosing.
utilities
requirement
no
be
limitations.
size
developer's
the
on
or
would
there
First,
fuel,
requirement
statutory
will
two
least
at
and
IPP
governing
can
suppliers
offer
generation
of
operation
utility
or
purchasing from QFs.
At
some
developers,
potential
currently
facilities
of the
simply
standard
QFs.
greenhouse
Spending
order
in
would
wholesale
without
having
and
making
the
suppliers
to
are
distribution
The
possible
to
utilities
increase
to
make
QF
for
increases
move
power
in
money
more
by
interconnected with one another.
it
possible
compete
cost
of
and
to
a
the
really
to
heat
a
developers
at
"barely"
interest
in
independent power
for
rate
on
generation
growing
provide
service
not
loads
become
to
is
are
to
the
such
generation
service
These
regulation.
detail presently.
trade
transmission
from
to
energy
supply
to
clearly
QFs
steam
contrived
expenditures
make
to
large
inefficient
is
few
developments
are
wasting
enter
to
There
PURPA
or
obviously
is
status.
necessary
wholesale
minimal
unnecessary
unencumbered
in
found
opportunity
the
QFs under
not
status
like
will be discussed in
with
associated
QF
changes
regulatory
that
developments
qualify
have
potential
environment
number of
increasing
unnecessary
obtain
to
projects
cogenerators
which
plants
these
of
An
of
Technically,
regulatory
There
evolution.
eye
the
in
regulators.
current
the
further
gleam
a
some
and
purchasers
their
to
power
primarily
are
IPP market, however.
fringes
as
IPPs
Furthermore,
exist.
conducive
particularly
qualify
time
present
the
supplier
that
or
to
we
wheeling
purchaser
are
observing
arrangements
when
they
has
also
which
are
not
been
make
it
directly
-24-
Table
wholesale
of
transactions
between
rising
summarizes
1
and
1985
and
oil
in
and
oil
types
have
1
prices
gas
dramatic decline
the
various
1986.
changes
the
periods
and gas prices between
1985 and
consumption increased by roughly 32% between 1973 and
kinds
all
leading
much more
increased
larger
a
to
mix used
resource
relative
between
declined
lower
as
to
rely
of
role
wholesale
electricity
to
domestic
utilities
and
costs
made
and
oil
gas
reflecting
term
longer
trends
more on wholesale trade
to
cover
the
period
of
response
to
market
Total
1985
during
After
term
short
the
to
term
wheeling
service,
transactions
less
continued to increase,
Overall,
meet the needs of
period
short
1985,
interchanges
market.
time
this
associated
NUGs
electricity
contributing
customers.
and
and
Wholesale trade of
.
in
Canada,
the
1985
transactions
retail
in
and
1986.
consumption
total
Longer term contracts and purchases from
economical.
however
did
supply
to
interchanges
than
to
and
1973
wholesale
competitive
the
see
between
place
time
these
consumption
electricity
total
took
that
chosen
to
in
have
come
customers
since
utilities
their
retail
have
also
1973.
addition
In
changes
regulatory
linking
the
the
governing
good
to
regulatory
past
rapidly
review
costs
involvement
industry.
utility
the
to
regulatory
years.
Prior
to
increasing
a
the
relatively
early
passive
loads
activist
and
in
and
regulatory
operating
utility
little
with
performance,
planning,
the
utilities
heavy
frequent
introduction
rapidly
to
It
has
been
regulatory
cost
new
over
a
loads,
capacity
transformed
involvement
disallowances,
of incentive
process
expanding
in
an
dramatically
presided
invest
arrow
through
goes
which
prices,
the
regulatory
the
process
controversy.
political
process
1970s
2
changed
has
important
been
Figure
naturally
process
declining
productivity,
and
1
customers
retail
That
was
there
Figure
both
In
process.
utilities
meet expanding
very
changes,
structural
performance, strong incentives for
financial
a
into
fifteen
electric
of
period
the
in
distribution
intervening
over
these
to
in
the
regulatory
mechanisms*^ designed
-25-
to
efficiency,
new
productivity,
poor
increase
declining
invest
to
utilities
new
in
Whether
controversy.
power
generating
compact
regulatory
and
substantial
broken"
been
has
prices,
disincentives
strong
themselves,
capacity
increasing
processes,
performance,
financial
utility
"the
procurement
supply
or
for
political
not,
has
it
certainly changed dramatically, and not always for the better (see below).
A
competition
toward
noting
utilities
that
sensitive
he
sort
a
chooses
switching
economically
is
demand
likely
be
attractive,
in
have
changes
moderate
been
has
de
as
rates
for
charge
can't
customer
a
of
suppliers
exclusive
facto
movement
any
if
little
of
any
Even monopolists serve customers whose consumption
do.
Electricity
economically
regulatory
retail
However, even an exclusive supplier
price.
to
the
at
importance
increasing
the
is
changing the status of distribution
price
shifted
worth
is
There
service.^*
fuel
that
level.
of
retail
to
change
final
to
and
economical,
response
to
increased
the
certain
changes
of
classes
large
in
where
and
self-generation
cogeneration
is
can
be
Economic
prices.
electricity
end uses where
production
of
location
the
in
of
threat
elastic
industries
in
where
industries
in
price
particularly
is
has
this
customers.
industrial
is
and
tended
may have
It
lead to higher rates for other customer classes, however.
ECONOMIC AND POLITICAL PRESSURES FOR STRUCTURAL AND REGULATORY
CHANGES
The
industry
problems
WW
after
the
cannot
or
be
the
II.
specific
None
of
strong
"deregulation"
a
in
general
solutions
existed.
ipecific
to
While
electric
conclusions
or
and
regulatory
for
found
performance of the
kinds
of
motivation
regarding
regulatory
that
has
industry
the
change
evolved
electric
performance
about
with
along
power
industry
the
been substantial academic analysis of
in
effects
reforms
the
in
consensus
intellectual
them
there
utility
structural
as
of
the
it
has
not
led
regulation
and
the
desirability
the
has
U.S.,
been
the
case
in
to
industries
-26-
such
as
these
changes
set
airlines.trucking,
Kennedy School do
consequence
Rather,
the
public
and
structural
shocks
experienced
changes
regulatory
by
the
turmoil
are
clear
a
the
at
economic
real
and
power
electric
to
taking
regulatory
political
to
classrooms
the
in
responses
policy
uncoordinated
individual
response
policy
Only
economic, regulatory and
the
to
economic
several
comprehensive
of
series
a
responses
fighting"
by
of
public
upon performance problems.
rational
emerge.
problems
comprehensive
coherent
a
agreed
generally
of
of
part
Nor
telecommunications.
(perhaps)
and,
railroads,
place
are
political
"fire
primarily
caused
during
industry
a
the
last fifteen years.
Changes
rising
costs
However,
concerns
led
about
shocks
economic
and
Figure
plants
fired
(a)
3);
(d)
an
1970s
effects
of
the
of
in
and
the
in
nuclear
early
in
economic
increasing
1970s
capital
costs
period,
costs
is
the
led
that
These
change.
for
It
to
shocks
1979/80 (see
and water emissions from power
building
of
power
and operating
plants
(see
Table
fossil-
2)
and
power based on economic, environmental and safety concerns;
the
general
and
in
shocks
in
air
nuclear
costly
rate
substantial
fell
1986.
As
of
inflation
unanticipated
(e)
excess
heavily
supply which accounted for roughly
of
the
post- 1973
growing
and
environment.
the
as
and formal hearings.*®
1974/75 and again in
in
on
constraints
unexpectedly
1980s;
resulting
prices
1960s
late
inflation
to
pressures
resulting
fuel
on
the
particular
in
fossil
responses
the
in
increases
rate
generation
electricity
turmoil
for
place
take
to
modest
fairly
1970s,
increases
(c)
increase
and
were
new environmental
(b)
plants;^"
demand,'^
These
large
to
more and more requests
political
beginning
opposition
to
the
economic
include
regulatory
changes
these
began
procedures
in
a
changes have focused on generation.
on
75%
result,
and
high
reductions
generating
the
interest
in
the
capacity
generation
rates
rate
(see
component
the
in
of
growth
Figure
of
pressures
for
regulatory
and
of
4).^'
electricity
of operation and maintenance costs and
the
late
65%
structural
-27-
Prior
compensated
between
systems,
productivity
real
by
1970
growth due
to
fuller
innovation
Kwh we
per
of supplying
kwh
a
of
To
prices
It
reflect
especially
rising
Rather
falling
than
increases
large
approvals
by
affected
customers,
and
utilities
ultimately
directly)
and
real
led
cost
utilities
resisted
their
by
oppose
to
by
responsible
to
administrative
but
choice
appointed
by
legislatures.
In
the
approval.
were
to
set
large
surprisingly,
seek
for
and
legislative
(or
end,
in
rate
commercial
residential,
governors
the
nominal
forum for those adversely
representing
in
in
repeatedly
applications
Not
them.
agents
political
regulators
requiring
These
groups
changes
to
turn provided a
in
such a way
in
response
no
had
increases.
rate
increases
aggressively
industrial
branches,
price
the
in
increases
price
to
The formal hearings
were
increases
large
upward
and
rates,
in
for
nominal
and
real
naturally
increases
cost
and coordination
nominal and
the
in
accelerate,
to
with state and federal regulatory agencies.
resistant
costs
formal hearings.
elected
These
downward
sticky
are
is
regulatory
and
of scale
large
see
electricity.
of economies
generating
technological
began
argued many years ago,** that the regulatory process works
I
costs.
stagnated.'"'*
of
other
increases
price
exploitation
to
and
than
coordination
increased
efficiency
thermal
the
technology,
input
as
began
to file for large rate increases
that
increase
to
economies,
more
were
generally
costs
scale
to
steam-turbine
However
costs
due
savings
cost
input
rising
opportunities
or
technological
average
1968
conventional
changes.*'
and
by
for
using
units
roughly
to
executive
few
a
utilities
found
states
that
they had a very difficult time recovering the costs that they had expected would be
afforded traditional cost of service treatment through the ratemaking process.
We
that
hit
can
the
responses
to
approved
by
a
get
electric
them,
state
feeling
for
power
industry
by
the
examining
regulators,
and
nature
in
the
patterns
industry
and magnitude of the economic shocks
1970s
of
and
1980s
electricity
financial
and
prices,
the
rate
regulatory
increases
performance before, during and
-28-
economic shocks that
after the
The average nominal
period
the
for
and
residential
for
series
Figure
in
almost
jump
show
prices
began
similar
a
decline,
to
inflation declined
way
Another
increases
7
displays
Until
roughly
jumps
big
sharply
after
1985
after
were
as
and
1973
state
of
net
interest
again
and
of
nominal
increase
rate
between
cases,
little
and
public
reliance
reductions.
designed
real
requests
1907
extensive
not
and
electric
cost
of
after
since
1920.^^
state
In
intervention
on
the
Rate
1979.
deal
with
large
and
there
inflation
to
is,
in
rise
and then
of
rate
1963
indeed
there
began
an end.
been
consider
by
was
rate
regulators
cost
increases
pass
on
introduced
rate
requests,
and
bring
had evolved over that period
continuing
to
period
few formal
increase
to
utilization
widely
relatively
off
fell
sustained
hearings
rate
rate
increase,
requests
a
1987,^*
were
to
came
rate
Figure
to
capacity
to
base
time.
abated,
formal
had
of
from
increase
regulation
to
suasion
that
time
of electricity
general
over
then
increases
rate
repeated
cases
moral
The regulatory process
to
past
A
the
deflator)
pattern
authorities
increases;
rate
commission
rate
in
informal
and
5.
stabilized
power industry had never experienced
increases
for
Real electricity
the
the
increased, and utility generating capacity construction programs
The modern
and
began
1979.
prices
increases
rate
declined,
rates
kWh
prices
real
rates,
regulatory
base
approvals
per
after
examining
base
net
GNP
whole
a
as
to increase.
by
is
by
no
and
interest
the
price
jump
Figure
in
Nominal
1970.
began
this
at
value
there
Applications
decreases.
with
1969
prices,
utilization
approved
annualized
the
average
groups,
using
By 1985 nominal and
look
decreases)
(or
real
and
1960
fuel
fossil
to
$1982
1973, and another big
pattern.
and capacity
(in
electricity
between
found
be
U.S.
the
for
consumer
all
can
separately,
of
after
as
of electricity
over
The nominal and
6.
continuously
1970, took a big
averaged
classes
prices
real
Kwh
per
price
1987,
to
industrial
the
Displayed
fell
1960
Let's start with electricity prices.
just discussed.
1
that
tbout
of
time
occurred
rate
was
after
-29-
1973
and
the
over
controversies
the
proceedings
administrative
associated
initiated
in response to utility requests to pass these costs along in higher prices.
The
increases
"regulatory
and
1968
increases.
We
should
pressures
abated
or
examine
common
the
proportion
of
book
information
for
several
The
price/book
high,
to
debt,
dramatically,
rate
of
generally
1974
After
capital.
failed
on
to
1960
of
all
of
earn
the
that
large
the
levels,
the
earned
the
did
their
cost
that
we
can
investments
are
calculated)
of
a
utility's
and
invested,^*
Table
the
provides
3
performance for the
financial
24
1960-1987 period.
was
of
era
a
than
one,
the
average
cash
coverage
interest
financial
excellent
were
reported
earnings
indicators,
rates
financial
stock
not
the
and after these
ratio
equity
of
as
equity
return
of
behind cost
cost
of
earnings,
were
ratios
performance of the industry was already starting
by these
Common
equity
on
earnings.^®
1968
to
greater
financial
with
1973,
however.
return
cash
during,
return
value
1984
indicators
of return on equity were far above
measured
before
stabilizing
a
as
book
indicators
significantly
the
of
rates
coverage
are
that
roughly
virtually
By 1968,
etc.
share
these
rates
were
ratios
deteriorate
of
from
Earned
utility
allowed
electric utility average over the
period
performance.
earnings
of
roughly
in
of
lagged
increases
variety
a
rate
interest
per
the
are
way
the
capital,
to
beginning
earned
the
with
of
price
new
suggests
to
performed financially before,
include
cost
Moody's
There
utilities
stock
utilities in
subscribe
I
1973 as price
after
recovery
a
reversed.
These
to
see
also
symmetrically
(calculated
relative
particular
in
how
infer
to
shocks.
cost
that
nominal costs should have been accompanied by reduced profitability for
in
after
utilities
view
resistance"
although
of return
keep
system
approximately
performance
price/book
the
of
ratios
up with changes
in
equal
below
interest
allowed rates of return on equity (see
growing fraction of earnings were non-cash accounting
one,
credits
the
to
the
to
industry
the
fell
appeared
cost
deteriorated
earned
the
utilities
rates,
Figure
basis
be
9),
for
and
which
-30-
was
assumption
the
given
of capital earned.
cost
economic
and
treatment
base
rate
generating
that
the
more
favorable
would
construction
and
again
eventually
investment
associated
performance only began
Financial
became
conditions
on
return
a
under
plants
equal
1984
generating
utility
the
to
improve after
to
be
as
capacity
construction programs came to an end.^
Public
and
capital
long
operating
run,
the
How
an
historical
state
are
It
to
year",^'
"test
two years
electric
in
a
that
to
new
put
Many
decision.
The
old.®'
hearing
rate
on equity actually earned
by
supposed
utility's
to
reflect
the
electricity
the
in
rates
over
industry
the
last
might
rates
utilities
a
in
rate
year.
cost
of
on
on
costs
be seen
on equity allowed
of return
and the
The allowed
equity
to
rely
still
based
effect
into
year
particular
that
current
go
commissions
of regulatory lag per se can
effects
in
state
and
together
filing
first,
conventional
into
built
rate
a
At
increases?
price
inertia
by examining the relationship between the average
by regulatory agencies
of
utility
"resist"
natural
year
a
least
at
render
process
on
relied
takes
so
the
regulatory
simply
process
least
at
the
of
determinants
While
system.
cost-plus
a
as
not a pure cost plus system, however.
is
it
characterized
primary
the
experience
did
commission
a
often
is
are
clear that
procedures.
get
that
it
exactly
regulatory
regulatory
costs
financial
twenty years makes
the
regulation
utility
is
and
earned
so
capital,
return
of
rate
return
of
rate
allowed rates of return should be approximately equal.
Figure
return
rates
equity
1985
provides
9
and earned
rates
information
on
of return between
the
between
relationship
1974 and
1987.
is
It
allowed
clear
rates
that
of
earned
of return are substantially below allowed rates of return (and thus the cost of
capital)
as
generation
fuel
during
prices
construction
most of
this
period
of time.
decline,
inflation
and
programs
come
an
1974 period are not available.
to
However,
my
The gap disappears only
interest
end.
earlier
rates
Comparable
work"
and
decline,
data
suggests
for
that
the
after
utility
pre-
the earned
-31-
of
rate
was greater than
return
The
1970s.
completely
(See Figure
came
understand
to
requirements.
interest
revenue
of
rates
common
mid-
the
to
return
also
is
price/book
stock
ratios
and
rates,
were
requirements
cost
plus
regulation.
the
use
of
to
the
to
incentive
of
when
original
state
mechanisms,
rapid
is
A
response
shock."^^
regulators
applied
designed
to
of
to
"phase
smooth
resulting
also
from
to
experiment
with
to
generating
unit
begin
primarily
high
regulators
State
a
revenue
inflation,
disincentives
efficiency
not
plus
base
variety
a
regulators
"front-load"
additions.^
"rate
did
that
rate
also
with
to
example,
cost
to
there
regulatory
potential
For
tends
capital
avoid
some
led
return
reasoned
a
stream
This
formal
"lumps"
as
sensitive
of
subjected
innovations"
principles.
depreciated
a
were
they
"regulatory
shocks"
"rate
big
applied
of
Regulators
increases.
rate
that
regulatory
rate
to
delays
sensible
use
based
leads
much more
become
quite
the
that
This
mechanisms
the
often
cost-of-capital
nominal
prior
capital
earned
utility
pressures
the
to
from established
significantly
nominal
in"
and
simply
course
respond
modest
of
depart
of
of
cost
and
allowed
behavior
the
of
lag
to
tried
variety
with
the
to
8).
Regulatory
initially
between
relationship
consistent
equal
or
performance.®*
However,
political
and
pressures
early
1980s
anticipation
generating
in
size
cost
to
future
facilities.'^
anticipated,
plant
the
of
rate
had
base,
of the
rate
of
regulatory
these
insulate
to
continued
utilities
been
none
innovations
consumers from cost increases.
increases
and
build
nuclear
capacity
needs
associated
or
and
coal
to
displace
These plants turned out
Kw
rate
to
responded
fully
And
increase
much more
than
the
average
and when completed would have
led
to
per
base
costs
on which
far
greater
capital
charges
are
oil
costly
if
as
in
gas-fired
and
than
embedded
significant
based
1970s
plants
generating
uneconomical
late
escalated
requests
burning
be
the
in
the
to
had
cost
of
increases
in
cost
of
traditional
-32-
service
principles
service
after
1979
fuel
rising
new
other
inputs
in
rates
inflation
in
fuel
under
on
of
and
an
increase
and
3
were
that
operating
to
As
the
of
of
rate
these
implied
rapidly
costs
rapidly
Giving
2).
large
response
in
to
commissions
regulatory
result,
a
general
often
increasing
including
resist
Table
enter
to
capacity,
the
in
treatment
also
costs.
and
4
base/cost-of-service
pressure
considerable
Figures
prices
other
and
rates,
(See
rate
top
most costly plants began
the
growing surplus of generating
a
interest
conventional
increases
of
face
rising
prices,
plants
came
the
in
affecting
inflation
Some of
had been applied.
these
plants
in
rates.
Many
post
commissions responded by subjected new power plants
regulatory
Between
"prudence" reviews.^
prudence
component
been
of
fraction
could
the
the
compensation would only be provided
than
accounting
its
possible
selectively
changes
has
less
in
than
the
probably
ate
amounting
the
disallow
to
a
utility
economic
on
the
for
value
order
of
of
the
20%
response
determinations
to
a
political
and
useful
"excess
of
my
and
of
since
some
cases
Where
regulatory
cost
that
of
service
All
plants
with
together,
investments
(Kahn and
Perl (1985)).
rather
and
capacity"
their
associated
This
concept.
made
it
unanticipated
knowledge no regulatory agency
operating
plant.)
problem
majority
position
the
on
best
of
completed
plants
disallowed.^"
and
used
building
the
In
routine
a
economic value of the plant was greater
based
costs
nuclear
all
become
were "imprudent" they sometimes have
taking
the
so-called
to tens of billions of dollars
Prudence
political
—
if
economic conditions (To the
rewarded
yet
cost
was
plants
were fewer than a dozen
now
have
reviews.
game,
there
reviews
investments
that
of
rules
these
1975
Virtually
"prudence"
of
show
not
prudence
process.
to
cost
total
changed
simply
subject
the
commissions
regulatory
the
of
have
1980
However,
cases.^'
1945 and
ex
to
in
accounting
utility
nuclear
cost
disallowances
than
the
application
stockholders
power
were
of
costs
plants,
largely
clear
a
well
-33-
regulatory
established
repeatedly
half
has
led
by
permanent
disallowances
process
economic
of
fixtures
for
of
1970s
the
of
regulators
and
decade
Many
and
of
while
early
1980s,
changes
disallowances
have
incentives
created
a
these
particular
In
process.
routine
risk
that
past
process.
become
increased
the
regulatory
regulatory
have
the
during
turmoil
the
facilities
account
to
the
in
requirement
the
increases
rate
changes
the
generating
for
large
for
profound
motivated
become
ratemaking
requests
rather
to
while
changes,
have
with
deal
However,
principles.'*
cost
the
in
been
not
forthcoming.
behavior
Utility
has
experience
of the post- 1973
generating
plant
investment
their
would
process
by
cost
in
is
willing
build
to
additional
have
underinvesting
in
Absent
capacity
are
they
suggested
they
in
the
economically
quite
looking
are
and
utilities
in
response
conventional
built
regulatory
unattractive.
the
Higher
term
that
station
electricity
costs
of
be
of
the
smaller
capital
less
conservation,
demand
penalties
generating
and
recently
capacity."
in
behavioral
and reduced
to
Several
investments.
this
to
experience
make investments
implications
appear
the
financial
the
central
environment
long
to
utility
plant
of
underestimating
are
investment
areas
in
customer
in
traditional
that
capacity
viable,
with
the
justified
fully
utilities
parties,
investments
ratemaking
generating
even
of
third
to
are
recover
fully
the
that
new
Few
light
not
generating
facilities,
in
new
of
major
on
they built a large
risk
sort
a
generating
needed,
is
associated
risks
new
when
changes
clearly
be
to
the
increases
those
if
by
would
significant
return
load
base
technologies,
financial
commentators
experienced
expected
capacity
Instead,
generating
the
appears
if
they
that
a
even
increases
result
new
large
past.''
intensive
was
that
perceived to be below the cost of capital.
where
country
rate
chance
there
is,
The
effect.
investments
reduce
The
increases.
minimization
recent
large
good
the
to
learned
Utilities
very
a
That
it.
resist
period.
was
there
responded
naturally
generating
response
reliability
would
-34-
be the consequences.
The
economic
were
changes
with
the
was
subject
not
the
largely
of
structure
to.
environmental
and
was
the
industry
Input
price
early
it
and
cooperatively
Exactly
the
distribution
for
affecting
though
not
of
that
burdens
the
distribution.
necessarily
fundemental
failure
the
in
entirely,
of
higher
As
a
with
associated
and
costs
the
result,
electric
provided
firms
the
in
way
government
countries.
did
affect
mechanism
political
was
of the system
or
costly
the
or
other
largely,
than
rather
failure
it
occurred
regulated
a
administrative
utility
have
in
is
it
that
growth,
integrated
utilities
"failure"
and
associated
industry
the
affected
and
U.S.
political
a
of
and the way that
industry
the
problems
failures
principles
would
etc.
structure
the
structural
economic
declining
capacity,
same
the
regulatory
theoretical
increases,
utilities
However, the structure of
the
whatever
1980s
owned
or
performance
inherent
of
and
behavioral
regulatory,
generating
excess
regulated.
that
stimulating
consequence
a
regulations,
1970s
late
"problems"
a
principles
theoretical
governing the way that they thought that they would be regulated.
Nevertheless
that
existing
incompatable
the
system
demand
for
the
electric
in
and
investors
with
to
deal
a
better
utilities,
while
to
so
rising
of
set
of
the
in
other
invest
in
cushion
the
new
is
need
these
to
The
facilities.
interest
space
capacity
fix
economic
particular
in
groups
to
come
was
a
system
to
govern
the
up
with
in
that
as
a
some
was
regulation
"hold
alternatives
supply
parts
broken
up"
of
gave
of
utility
before
ihortage.
has
latent
situation
capacity
to
a
of
of investments
regulation
the
inability
created
opportunity
revealed
disappearing
The
clear
it
politically
are
shocks
excess
an
made
has
electricity.'*
arrangements
future,
1980s
arrangements
institutional
of supplying
with
rapidly
and early
1970s
institutional
generating
and
the
costs
satisfactorily
breathing
that
of
administrative
some
capacity
however,
rapidly
power industry
disincentives
excess
and
industrial
OF>eration
regulators,
experience
the
the
the
The
country,
become
more
-35-
While
urgent."
but
1978,
late
intellectual
consensus
existed
provide
to
and structural reforms, experience with Title
regulatory
for
no
not
implemented
really
until
the
passed
turned out
has
1980s,
early
PURPA,
of
II
framework
natural
a
in
have
to
provided both a positive and normative framework for some potential solutions.
THE PUBLIC UTILITY REGULATORY POLICY ACT OF
ENTRY INTO GENERATION
November
In
was one of several pieces of energy
Administration
Carter
Congress enacted the Public Utility Regulatory Policy Act
1978,
PURPA
(PURPA). ^^
with
deal
to
were of particular importance
of
regulation
time-of-day
including
marginal
state
more
than
implemented
gradually
is
the
fair
determine"
desirable
and
consider
whether
had
little
that
on
effect
PURPA's requirement
that
state
PURPA
The second primary
section
with
deals
to
companies
heat
for
use
utility
that
in
obligations
install
to
or
of
sources
and
a
variety
to
states
think
that
new
it
and
'consider
would
principles
adopt
have
states
I
do
to
be
structure
rate
of relevance to electric
utilities
(Title
purchase power from and provide backup services
equipment
industrial
of
lines.^*
ratemaking
decisions
PURPA
waste
to
processes
power from certain small power production
energy
individual
each
many
the
of
of no current policy importance.
cogeneration
commercial
innovative
regulatory
is
not
although
alternatives,
reforms
of
methods,
application
the
or
the
directs
It
were under no federal obligation
these
introduction
the
whether
with the
deals
I)
ratemaking
rates,
along
principles and this section of
II)
the
ratemaking
retail
however,
say,
states
evaluate
life-line
rates,
PURPA
of
portions
(Title
first
traditional
to
determine
to
However, the
adopt them.
will
alternatives
and
principles
Two
management services."
load
interruptible
rates,
pricing
cost
of
The
promoted by the
legislation
crises".
utilities.
and
rates
variety
a
energy
"the
electric
to
electricity
consider
to
states
retail
AND COMPETITIVE
1978
produce
(cogeneration)"
facilities**'
fuels,
electricity
including
that
make
garbage.
and
use
jointly
purchase
to
of
with
renewable
PURPA
requires
-36-
utilities
(referred
facilities
power from qualifying cogeneration and small power production
purchase
to
backup service
generally
to
FERC
directed
independent supplier had
used
be
meet
to
QF
be a
to
which
at
defining
rules
issue
to
determine that rates
to
provide them
to
with supplemental and
"non-discriminatory" rates.
at
PURPA
to
"QFs") and
as
the
specific
and specifying the methods that were
utilities
would be obligated
power from them and provide backup and supplemental services
guidance
specific
and
reasonable
purchase
rates,
"exceeds
that
from
aside
statute,
non-discriminatory
rates
at
the
in
the
that
is
cost
The only
provisions
could
not
the
utility
to
purchase
to
them.
to
boilerplate
utilities
incremental
the
an
criteria
be
for
just,
required
of
to
alternative
electric energy."**
FERC
1980
In
The
determined.*'
principles
in
individual
state
rules
is
costs
that
the
independent
meet
to
regulatory
the
that
utility
supplier
some estimate of
subject
price
to
that
price,
contracts
with
contracts,
the
costs
how
and
deliver
The
the
to
are
"avoided
or
cost
market
Given
financial
electricity.
of
genera!
cost
obligated
the
and
performance
FERC
regulation.
for
price
QF
depends
largely
left
to
incorporated
in
the
reflect
the
should
to
from QFs
as
are
the
the
an
utility
to
its
states
themselves
not
obtain
to
in
specified
a
bilateral
in
the
to
control
tpecify
exactly
ability
to
equal
rates
at
specified
provisions
on
from
purchasing
They can seek
entirely
it
the
suppliers
electricity
non-price
ratemaking
to
QF
by
be
to
rules
these
available
purchase
to
of
pay a
principle")
Thus,
service
value
to
were
prices
general
principle
alternative
best
costs."
relevant
establish
to
obligated
is
the
implementation
the
"avoided
(the
utilities
their
utilities.
delegate
utility
compared
the
QFs
a
was
took
commissions.
avoids
profit
reflects
FERC
to
price
Thus,
load.*'
its
but
how
specifying
rules
approach
rules,
its
1980
issued
they would implement this principle.
As with any
statute,
the
intent
of Congress embodied
in
PURPA
is
difficult
-37-
efficient
for
a
The
determine.
to
of electric
use
consumers,
broad
etc.*^
vision
service
the
clear
is
it
clear,
regulation
enter
to
in
electric
conservation,
and
markets,
unencumbered
an
alternative
reflect
encourage
to
nearly
so
opportunity
significant
first
generation
not
anything
or
industry,
provide
does
statute
generation
provided the
of
suppliers
the
that
wholesale
utility
market
the
however,
PURPA
that
independent
"entrpreneurial"
for
of
energy
to
reduced reliance on imported fuels, equitable rates
fairly
is
It
refer
history
legislative
promote competition
to
However,
exciting.
the
facilities,
de-integration
vertical
and
statute
by
cost
of
utility-owned
to
generation.
SUPPLY SIDE RESPONSES TO PURPA
We now
useful
of
year for
non-utility
fall
U.S.
from
available
generation,
then.
generating
By
including
well
as
as
were
that
NUGs
1986,
capacity
rapidly.
increase
to
declined
NUGs
than
they
The
a
from
PURPA
fraction
1983
much
of
was
slightly
U^.
and
smaller
however.
The
mask
three
conflicting
trends.
the
kinds
that
privately-owned
The
passed.**
until
about
pattern
slightly
of total
is
1983
capacity
increased
proportion
1966,
all
generating
has
in
did
1986,
to
producers'^
conventional
declined
until
1966
power
small
and
before
capacity
provided
generation
of
supplies
therefore
is
These figures include
and
cogenerators
significantly
still
NUGs
operating
available.**
NUG
It
Table 4 shows the amount of capacity
operation
that
on
had
has
cogenerators
older
in
numbers show
began
then
with
associated
which data are currently
plants
aggregate
since
PURPA
that
effects
generation
PURPA
under
generating
and
the
by "non-utility generators" (NUGs).
Kwh
latest
of
examine
to
provided
and
have roughly five years of experience with PURPA.*^
similar
U.S.
for
generation.
These
period
a
aggregate
significant
figures
amount
of
pre-PURPA
conventional
During
industrial
this
time
generating
-38-
which provided some or
capacity
transportation
PURPA
supply
NUG
along
NUG
and
(iron
feeling
better
a
for
mining
steel),
MW
Approximately 15,000
which
with
with
NUG
of
expected
current
additions
uncertain,
but
licensing
pipeline,
accounts
for
ignore
projected
third
to
a
to
Table
5
small
generation,
the
generating
1979 and 1986, almost
much
categories
that
in
still
fraction
larger
of
are
Projections
are
that
"other").
course
construction
the
of
and
from cogeneration and small power production
capacity
half
a
capacity.
nuclear plants
in
this
capacity represents a very small
represents
it
About
Most of
1986.
power production
NUG
industrial
category.
(included
capacity was added between
or
of
types
each
in
generators
industrial
Finally, although
domestic
to
we
if
a
utility
additions
other
1979 had been retired by
conventional
would qualify under PURPA.
fraction
and
retirements
cogeneration
the
into
falls
of
and
responses
quantity
the
power producers, and
smaller
capacity operating in
was associated
capacity
of
get
metals
regard
1979 (pre-PURPA) and 1986 (post-PURPA) by type of
capacity for
plants--
of the
all
We
industries.**
primary
the
in
source--cogeneration,
generating
40%
plants
have been especially true with
to
by disaggregating the figures into pre and post-PURPA capacity.
down
breaks
This appears
retired.
power
private
to
was
users
industrial
of the electrical needs of certain types of large
all
of anticipated
electricity
requirements
capacity
over
the next ten years.***
It
is
also
utilities.
Prior to
meet
or
all
As
capacity.
own
sale
to
use,
to
the
retail
part
I
useful
PURPA
of the
examine
to
a great deal of the
electricity
PURPA
utilities.
rates
NUG
requirements
at
have
the
gave
utility's
probably
utility,
NUGs
of the
increased
industrial
NUGs
and
their
local
user
owning
that
supplied power for their
but did not produce additional power for
the opportunity to
marginal
NUGs
capacity was tised exclusively to
have already discussed, by and large
reducing demand on the
utility
between
relationship
the
supply
incentives
cost.
for
sell
all
Despite
of their production
the
cogenerators
fact
to
that
use
rising
internal
-39-
production
— there
utility
that
Table
sales
4
been
has
sold
is
"back-out"
to
to
the
to
dramatic
a
NUG
generation
In
1978 only
utility.
—
in
consumed
to
NUG
of
NUG
of
PURPA
since
internally
output
their
sell
proportion
the
down between
broken
5%
than
rather
increase
than
rather
utilities
displays
purchases
utility
NUG
total
generation went to
the
to
generation
was
passed.
and
production
By 1986
utilities.
was 36%.
the figure
PROBLEMS WITH IMPLEMENTING THE AVOIDED COST PRINCIPLE
The
experience
the
the
several
last
the
that
"avoided
and
party
suppliers
are
states
non-price
terms
fact
in
and
NUG
higher
to
supplies
QF
is
utility
of
capacity
electricity
and
environment leading
It
to
higher
to the "right" prices
useful
to
start
purchased
sets
power
like
that
retail
why we need
power
of potential problems that
at
may have
suppliers,
whether QFs or independent suppliers more
generating
Regulated
facilities
distribution
rather
than
and
utilities
way
the
third
promotes
that
high encourage
too
discourages
rates.
special
Why
all.
economical
by
are
low
too
this
Is
costly
less
regulatory
integrated
utilities
required
distribution
govern
to
input?
There are
regulatory
utilities
three
intervention
from
third
to
party
generall>':
may have had
purchasing
regulations
not treat utility procurement
procurement of any other
utility
a
specifying
This wastes resources and
electricity
promote
(1)
that
Prices
are
in
for
and quantities?
by asking
purchases
between
contracts
electricity.
Prices
rates.
leads
of
But how do
price.
choose
regulators
significant
that
when they implement
price
right
be built and operated.
to
decisions vis a vis purchased
primary
clear
it
whether the system works
an economical and reliable supply of
unnecessary costly
the
that
conditions
determines
largely
setting
The process
principle?
cost"
price
leads
makes
years
be forthcoming from independent suppliers at some
supplies will
we know
of
power
from
private
third
incentives
parties
to
even
own
when
-40-
more
buying
was
passed
through
provided
automatically
incentive
profit
little
in
power
purchased
Because
economical.
retail
purchased power transactions are more or
utilities
to
power
purchasing
or
less
historically
on purchases from third parties to meet capacity
rely
needs;*'
avoid
more
are
process
regulatory
the
rates,
expenses
from
party
third
This
wash.
a
less
may have
and
suppliers
lead
discourage
to
self-generation.''
Since
(2)
connected
may
have
therefore
and
levels,
one
only
to
commercial
a
utility
party
third
restrict
wants
that
only one buyer to deal
has
it
firm
industrial
monopsony power, pay
classical
artificially
or
cogenerate
to
with.
The
local
is
utility
below competitive market
prices
purchases
of
favor
in
internal
production."
Prior
(3)
the
run
long
provided
to
1980s
early
retail
supplying
of
costs
wrong
the
the
signals
central
station
below
generally
of
estimates
Retail
electricity.
whether
customers considering
industrial
to
were
rates
rates
thus
buy from
to
the utility or to self-generate.
The
buyer's
requirement
"avoided
Assuming
that
estimates
in
if
these
supplies
are
however.
when
or
at
these
a
would
It's
third
lower
otherwise
than
avoided
utilities
parties
cost
than
build.
price
a
the
reflecting
can
the
from avoided
fashioned
a
is
standard
pricing
by developen and selected by
primary strength
electricity,
be
principle
cost
costly
The
can
contracts
offered
less
utility.
supplying
of
attributes^
owns
the
to
avoided
be
at
have been a response to these perceived problems.
to
purchase
the
to
weaknesses,
parties
practice,
supplies
available
costs
appropriate
from QFs
purchase
utilities
apf>ears
QF
encourage
only
cost"
that
the
alternative
approach
cost
conceptual.
is
should
supply
utility
other
be
willing
generation
has
Furthermore,
the
and
options
strengths
purchase
to
with
optimal
both
if
utilities
will
and
order to minimize the
In
can supply from
that
generation
in
cost
from
equivalent
generating
supply
of
third
non -price
facilities
third
it
party
-41-
production
be
will
forthcoming
avoided cost evaluated
The
primary
implementing
gave
often
can
be
the
easily
impression
that
calculated
and
accurately
the
except
compensate
the
at
conditions
real
delivery
rates,"
provide
diverse
FERC
QF
—
with
which provide that the supplier
spot
pricing
in
addition
to
reflecting
to
enter
duration
dispatchability,
of
supply
that
into
agrees
shortage
to
costs
at
time
of
utilities
offer
to
cost
term contracts
long
in
technologies,
fuels,
formulas,
Such long term
adjustment formulas.
price
commitments,
determination
price
contractual
supply and demand
energy
require
calculate
to
simply
and
operating
often
and
difficult
utility
"avoided
terms
particular
a
the
that
be paid for capacity and energy delivered based
will
of prices and
set
with
opportunity
the
very
number
the
establish
is
system
rules
objective
to
run
short
of
difficulty
single
it
where
.
the
is
utility's
avoided cost principle
must be signed with suppliers that vary widely
contracts
dates,
a
the
regulatory
state
suppliers
on a Dre-determined
on
However,
and
reality
associated
cost"
based
time.
In
balance
in
the
to
of the
a
is
regulators
circumstances
those
supplier
by
contracts.
time of supply
the
in
in
cost"
is
equal
is
principle
cost
Early discussions
avoided
"the
avoided
"true
relationship
avoided
avoided
the
utilized
power
of purchased
conditions
of
properly in practice.
it
margin
the
where suddIv and demand
at the point
weakness
on
price
the
if
of
allocations
terms of
initial
characteristics,
reliability
risk
delivery
buyer
between
and
seller, etc.
Unfortunately,
avoided
prices
cost"
that
diverse
in
set
advance
measure a
host
of
a
can
that
utility
be
is
no single objective measure of a
calculated
should
delivery
utility's
simply
agree
in
and
then
advance
term supply relationship.
of long
of
there
the
best
applied
to
pay
When we
we can do even
to
determine
estimating
theoretically
expected avoided cost at the time a contract
assumptions
about
future
supply
and
demand
is
is
conditions.
the
to
"true
"proper"
pursuant
cogenerators
are
utility's
to
a
avoided costs
calculate
some
executed given
Even
a
a
utility's
-42-
experted
specific
cost
contracts
and
and
(utility
We
avoided
can
imperfectly.
It
quite
is
initially
understood
through
administrative
between buyers and
and
very
capacity
meet
expected
be
suppliers
with
in
Figure
with
initially
to
10.
the
a
simply
then
is
no
that
one
the
annual
contracts
utility
As more
QF
capacity
improved
The
reliability
the
utility
additional
and
is
to
demand
deferral
of
subsequent
run
party
function
third
for
have a slope that
parties
third
build
to
additional
experiences
purchased
capacity
the
own and
sloping
otherwise
purchased,
eventually
to
own
its
third
otherwise
derived
would
the
and
from
Power purchased from
that
as
long
utility's
downward
utility's
suppliers
supply costs would
gross
would
the
in
a
generating
with
needs
run
has
take
Let's
of
conceptual
own
party
purchased
utility
cost-minimizing
a
measure
capacity
reflected
is
their
future
all
average
its
generation
needed
of generating capacity.
to
of
principle
cost
future.
the
meets
calculated
of
is
demand.
longer
agencies
principle
basic
the
group of third
in
utility
quantities
capacity
displaces
capacity
related
and operate
period
the
calculation
This
build
amount of capacity acquired.
electricity
value
replace
avoided
The AVCj function has purposely been drawn
expected
surplus
We can
"simple"
heterogeneous
a
where
situation
Such
supplies.
varies
either
particular
a
increasing
order
itself.
AVCj
party
in
can
by determining how much
reduced
very
cases
cost
conditions
some of
illustrate
to
FERC's
that
utilities
in
resources.
cost
of>erate
the
case,
generating
avoided
loads
avoided
the
contract.
regulatory
state
and
terms
the
help
will
power from
purchase
or
reference
problems
that
most
many
in
cf
supply
electricity
term of the
the
imperfectly;
nor
conditions
°^
example
simple
of
future
over
implementing
of
determination
only
FERC
neither
that
about
conditions
formulas
difficulties
sellers.
assume
Let's
clear
the
implementation
into.
mechanical
using
it
demand
with
and
terms
non-price
assumptions
alternative
and
non-utility)
estimate
A
with
numerous
with
vary
will
initially
capacity
a
meet
utility
growing
has
some
additions.
-43-
At some
capacity
additional
point,
no
has
capacity
value
at
and serves only
all
to
displace the operation of existing utility generating capacity.
The
be
generally
thing
first
function
a
The second
value.
period
that
typically
where
AVCj
actually
actual
avoided
and
slower
end up looking
of
thing
note
could
end
lower
that
since
the
into
we must make
future,
fuel
expected
The
the
we can do
best that
value for the avoided cost function, recognizing that
Third,
is
the
generation
A
function.**
course
could
avoided
cost
and
Pj.
If
QF
pay
supply schedule
If
(S3).
functions
Assume
assuming that
supply
However,
if
there
10, the optimal Quantity is
that
AVCj
function.
functions
and
as
considerable
AVCj
and
the
not
Sj
Sj,
Figure
in
uncertainty
certainty
then
AVCj
the
is
regulator
the
turns
It
or
are
the
as
however
that
the
actual
He
wrong.
guesses
cost
AVCj
be either P, and
Of
well.
It
relevant
QF
price
supply
of nature
P,.
As
I
always Q^, however.
relevant avoided
out,
could
prices
third
valued
optimal
states
that
10.
the
that
two other possible
of
single
a
AVCj
price
right
supply
the
is
that
a utility offered to buy at this price, then a competitive
(AVCj/Sj and AVC5/S3), then the optimal
have drawn Figure
depicted
is
we knew with
were
certainty
what
avoided cost
since
prices,
could
function
uncertain.
knowing
requires
is
come up with some expected
administratively
known only with
is
supply
would be Qj.
response
QF
lower
or
(Sj)
to
various
at
hypothetical
higher
would be
be
will
supply schedule
this
be
offer
to
a
about
uncertainty
cost
we knew with
if
determining
function,
cost
required
are
utilities
party
avoided
"true"
be obvious that even
should
it
is
it
is
for
demand growth
If
avoided
actual
single
a
higher than expected, the
AVCj.
like
not
will
it
calculation
the
great
is
are
prices
up looking more
than
there
certainty,
acquired,
supply
party
third
for example,
If,
AVCs.
like
far
lies.
costs
is
we knew AVCj with
if
amount of
the
to
even
that
is
extends
costs
fuel
note
to
sets
function and
avoided
S^
or
cost
Sj
Pj
S,
are
functions.
as
the
is
the
the
By
offer
price
relevant
actual
setting
QF
supply
Pj,
a
-44-
QF
competitive
should
that
supply
be
out
now
is
QF
competitive
there
different
Optimal
set
begin
the
reflect
QF
actual
frontier
of
current
contractual
with
to
and
align
ten
third
for
be
have
incentives
different
supply
the
party
'simulation'
conditions.
the
very
initially
of
the
Several
that
variety
a
fixed
price
and
of
1988b).
(1988a,
attributes,
is
there
price,
properly
to
and
reflect
properly
would look
This
supplies.
economics
little
right
states
of
equilibrium
used
fairly
is
to
like
if
there
a
formidable
go
beyond the
term
long
sensitivity
simulating
involves
task
regulators'
do so accurately, regulators would have
was
who
buyers and the sellers (a discussion of
supply contracts
regarding
suppliers
complex
fairly
a
At
at
(Joskow
perform,
to
specify
capacity
for
are
thereafter.
includes
negotiated
inefficient
generally
QFs
with
years
generally
may
be
Thus,
third
the
mistakes
of power and
years." Contracts
future
party
allowing
costly
contracts
twenty
to
negotiated
with
below).
knowledge
regulatory
terms
delivery
will
contracts
market
There
relationships.
associated
of
follows
Indeed,
first
would
this
contracts
of optimal
set
before
the
it
supply responses.
supply
of
very
to
but
supply
competitive
and
Pj,
sets
functions,
prices
term
of risks between the
allocation
competitive
undertaking.
that
properly
value
the
contracts
what a diverse
a
supply
to
The
Setting
QF
different
into
supply
While contracts could specify a single
believe
to
provisions
in
years
five
QF
long
contracts
several
the
them can lead
to
regulator
that
AVCj/Sj.
Qj.
periods
for
of
in
time.'*
term
long
differences
were
delivery
in
reasons
non-price
to
time,
the
years
five
least
at
and
cost
is
than
further,
schedule
points
good
are
nature
respond
to
matters
beyond roughly
needed
of
rather
payment
particular
to
avoided
true
state
sector
complicate
and
delivery
the
output
supply
negotiated
generally
promise
actual
assume
Alternatively,
(Qi).
are
zero
Qj or Qj, much more than the optimal quantity
is
uncertainty over avoided costs and
is
To
any
the
that
response
when
supplied
AVC3/S5
assuming that
turns
response
contractual
to
the
problems
price
and
non-price
mechanical
estimation
-45-
approaches
conditions
dangers
of
available
of
attracted
have
making
been
prices
long
contracts"
Costly
mistakes
Probably
fixed-price
These
response
The
that
of
costs
these
Other
and
the
lead
will
to
QFs
fuel
is
were
too
prices
and
that
payment
payments
higher
utilities
electricity
New
Maine,
Texas,
(e.g.
the
conditions
excessive
the
or
of
for
contracts"
changing
contracts,
states
terms and
payments
reflect
buy them out or defer them,
customers.*"'
offer
resulted,
example
worst
the
specified
to
and
terms
fixed
have been made by those
the
"standard
quickly
with
simulate
to
contracts
adjusted
not
supply.
to
other
for
term
supply
large
much
too
offer
approach.*^
California.
in
unanticipated
the
suppliers.**
this
payments were
these
high,
QF
"standard
on administrative procedures
available
experience
with
all
taken
relying
generally
the
up
to
have
that
states
come
to
York,
Connecticut) faced similar problems, although they generally found a way to allocate
the
excess
The
has
inefficiently
all
with
experience
contracts
offered
supplies
has
or
It
.
we had
us
on
go
to
contracts,
the
blush have
much
effort
how
to
the
an
on
impacts
approach
increase
suppliers
electricity
with
standard
and
sector
and
offer
system
the
into
costs
PURPA
power
independent
consumers.
electricity
through
party
third
experience
early
develop
recommend
to
integrate
to
unnecessarily
will
was
adverse
the
regulation"
"price
the
shown
reduce
to
If
prices.
standard
would
not
offer
first
at
it.
COMPETITIVE BIDDING AND NEGOTIATION SYSTEMS AS AN ALTERNATIVE
Happily,
prices
(and
more
which
contracts)
at
requiring
utilities
this
an
standard
efficient
proceeding
to
offer
QF
as
generally
utilities
sign
(the
they
the
will
be
contracts
price
generation
did
and
terms
obligated
with
regulation
procurement
California,
in
all
to
conditions
set
approach)
is
who
not
One
the
to
only
alternative
term
long
from third
offer
the
administratively
standard
of
take supplies
of those
system.
to
parties
supply based
way
is
to
to
and
on
structure
set
target
-46-
ouantities
example
for
.
supply
bids
to
(the
quantity
these
Figure
in
Qj
quantities,
and
10,
choosing
competing
solicit
to
utilities
most economical mix of bids submitted
the
approach). *°'
bidding
regulation/competitive
require
The
regulatory
the
sets
quantities and the market sets the prices.
Another approach would be
primary
the
regulatory
with
contracts
simply
other
wholesale
coal
production
for
their
future
be
more
efficient
could
convince
Information
regulators
derived
provide
region
projects.
utilities
to
fail
to
distortions
QF
of
suppliers
needs. ^"^
generation
Since
power supplied
than
third
removed,
are
other
by third
approach
as
the
by
to
as
some
internal
parties,
utilities
but only
are
not
utilities
evaluate
with
such
inputs
least
supplies
utilities
along
suppliers,
at
parties
third
which
against
party
by removing
make economical
generating capacity themselves,
yardstick
this
matter
with
from contracts signed with
to
the
competing
more economical
that
refer
will
I
as
own new
natural
a
do
they
just
of
these
with
negotiate
suppliers,
could also be permitted to
can
to
lead
Once
heart
the
to
may
that
suppliers.
expected
be
provide
to
party
third
would
distortions
go
to
utility
they
if
available.
in
a
given
construction
negotiation/yardstick
competitive
approach.
There are
good reasons
approach
negotiation/yardstick
performance
regulation).
of
it
attributes
It
how much
is
for
offer
is
contracts
supply
at
often
this
to
that
much
easier
posted
starkly.
The optimal
uncertain
states
the
yield
price.
price
of nature
is
that
(quantity
a
specify
will
believe
than
capacity a utility
them
to
is
offer
regulators
likely
to
bidding
competitive
regulation)
standard
for
a
have
will
to
make
competitive
much
approach
offer
contract
or
better
(price
a fairly precise estimate
need over a reasonable time horizon than
and non-price terms and conditions of standard
price
an efficient supply response from suppliers willing
Figure
could
be
realized.
10
Pj,
has
Pj
been
or
drawn
Pj,
to
make
depending
The optima! quantity Qj
on
is
this
point
to
quite
which of three
invariant
to
the
-47-
of
state
however.
nature,
from being optimal.
far
to
determine
specifying
too
proper
the
much
whatever
for
the
quantity
right
is,
and non-price terms and conditions of contracts.
risks
of buying too
capacity
much
acquired
is
are
that
price
the
quantities,
quantities
to
it
and use a bidding or negotiation system
quantities
target
to
lead
we know approximately what
Since
makes much more sense
wrong price can
the
Setting
or
too
paying
two approaches
These
minimized.
are
capacity and
little
By
also fit in naturally with utility planning procedures.
The
approach
negotiation/yardstick
the
utility
through
scrutiny. '°*
ameliorated
be
market,
a
The
consequence.
•well
and
as
the
conditions
of
economic
and
supplier's
own
needs
with
their
subject
are
then
bids
to
the
suppliers
helps
supplies.
If
to
the
to
free
review
of
attributes
fuel
The
a
prices,
utility
that
does
the
not
utility
get
in
docs
enough
economic
of
supply
turn
is
by
bids
to
pay
meet
non-price
and
the
to
meet
interest
and
utility,
the
and
the
its
capacity
between third
too
its
much
as
terms
technology
free
utility,
self-dealing,
non-price
Competition
not
and
inflation
and
announced
particular
utility
against
the
in
preferable
the
is
price
general
price
the
mix of supply offers made.
ensure
guard
to
weights
the
reflect
capacity
capacity
characteristics
evaluating
for
structure
to
regulatory
on a system that allows the
weights
regarding
clearly
diverse
rely
regulatory
preferences.
best
to
specify
assumptions
technical
risk
have
suppliers
to
approach
negotional
mechanical
generating
generating
to
contracts
detailed
to
future
all
of
through
owning
against
given
is
conditions
specified
subject
or
buy
to
makes sense
regulator,
suppliers
toward
agrees
utility
potential
planning
The
rates.
a
competitive
conditions,
its
mechanisms
incentives
therefore
It
than
rather
or
flexible
approach.
terms
regulatory
If
be
competitive
the
flexibility
and
terms
the
how much must
evaluation
contract
and
and
bidding
how much
on
primarily
projects
and
negotiation
bilateral
competitive
the
turns
specific
select
to
"self -scoring"
can
between
difference
third
capacity
party
party
needs
or
-48-
more economical
to
needs as well, the offers made
to
determines
of
its
provide
that
is
it
benchmark
natural
a
evaluated
and,
in
theory,
upon
generation
can
be
made.
In
market
competitive
regulatory
for
and
rules
which
either
party
third
incentives
that
experience
with
which
against
compensation
or
all
of
supplies
the
lead
objective
to
and
choose
stimulate
to
is
be
utility-owned
for
generation
utility
can
decision
this
arrangements
regulatory
the
case,
some
satisfy
to
itself
through a competitive solicitation process
it
yardstick
or
capacity
build
introduce
to
the
a
mix
best
of
supply options.
Only
can
give
further
competitive
scoring
facilities
more
of
However,
programs.
believe
I
that
for
from
supplies
for
bilateral
and
more
becoming
already
and
strengths
the
programs
is
it
systems
room
little
regarding
bidding
structured
bidding
leave
that
evidence
empirical
combinations
various
to
firm
us
procurement
generation
alternative
negotiation
weaknesses
that
be
built"
of
negotiation
flexible
clear
"to
approaches
rigid
self-
generating
work quite poorly compared
flexible competitive negotiation systems.
BIDDING AND NEGOTIATION SYSTEMS IN PRACTICE
A
utilities
the
use
to
several
than
another
requests
for
increasingly
have
wisely
regulation
bidding
or
based
listed
in
bidding
Table
proposals
capacity
6.
(RFPs)
from
In
for
non-QF
on
A
general,
specified
wholesale
standard
negotiation
suppliers
of
of
involve
(IPPs)
QF
as
In
extended
utilities
systems
of
facilities
contracts. ^°^
been
have
programs
quantities
qualifying
offer
list
required
or
system to determine
PURPA
selected
these
permitted
negotiation
systems
negotiation
competitive
or
either
from
purchases
supply sources, not just QFs.^'*
competitive
are
states
bidding or competitive
price
competitive
all
introduced
of
of
governing
conditions
relying
cases
encompass
competitive
a
and
terms
rather
number
growing
that
one
capacity
well.
have
type
utilities
to
or
issuing
(and
These
-49-
proposals
of
levels
contain
the
detail.
In
RFPs),
scoring"
of
conditions
screening
some
device
select
to
used
evaluation
and
rank
to
of
negotiation
other
the
cases,
of
set
propose
utilities
specifies
directly
In
small
a
the
limited
the
to
contract.
final
a
RFP
the
be
only
subject
that
criteria
cases
can
responses
that
detail
evaluation
criteria
RFP
initial
sufficient
in
used
is
the
that
("self-
and
terms
detailed
the
various
in
winners
select
suppliers
target
use,
to
as
a
then
utilities
negotiate with further to arrive at final selections and specific contracts.
So
introduced
QF
with
attractive
and
price
"mom
generally
non-QF
and
non-price
and
generation
terms
and
to
some or
fill
contracts
of their capacity
appear
that
companies
major
but
all
have
to
The winning bidders
conditions.
operations,
pop"
negotiation
meet the supply needs put up for
to
(IPP)
and
bidding
competitive
Table 6) and have generally been able
(see
needs
have
that
utilities
all
have found abundant supplies offered
systems
bids
far
with
very
not
are
substantial
experience designing, building and operating generating plants. ^"^
has
It
facilities
to
period
of
supply power to
time
on
reliance
integration
utilities
generally
cases,
term
contracts
very
be
"relationship
theory
of
been
to
two
if
QF
built
investments
a
are
and
the
the
an
power
utility
to
contract.
imperfected)
Investments
of
in
Independent
be
sold
to
In
the
a
suppliers
are
not
to
likely
in
the
to
be
the
single
cases,
literature
or,
the
in
a
buyers.
in
on
have
a
few
independent
which the plant
other
have
facilities
utility
the
vertical
to
facilities
generating
latter
which serves the area
path
generating
in
find
don't
I
alternative
discussed
type
the
utilities.
transmission
purchase power over a long
to
the
in
(perhaps
contracts. ^°*
proximate
contractual
sunk,
advance
attributes"
provide
three
supplier most rely on
provide
specific
to
as
in
utility
build
to
purchases are supported by
these
if
willing
generally
are
suppliers
and only
surprising.
firm
the
or
specified
prices
at
long
to
important
to
that
clear
term purchase contracts that obligate the
long
the
become
also
is
Once
particularly
located
these
attractive
-50-
bargaining
with
position
behavior ex
of opportunistic
hazards
and investors
customers
their
post
Even
.
want
they
norm.^^
get
to
it
While
can
regulation
in
principle
be
like
concerned about the
New
England, where
independent power suppliers
to
customers,
preferreo
their
to
areas
in
wheeling service has generally been made available
must
term
long
the
hazards,
contractual
these
mitigate
are
contracts
if
suppliers generally recognize that regulatory protections are necessarily limited.
The
reliance
contracting
term
of
issues.
built,
and
efficient
from
each
for
investments,
that
contingencies
ability
integrated
different
of
This
the
rely
should
incentives
will
put
easy
on
with
once
more
than
between
vary.
It
fuel,
perform
generating
to
been
obtain
to
The
when
price
uncertain
the
seller,
the
into
facilities
(or
and
reliability,
and
buyer
the
difficult
is
have
arrangements.
to
efficient
power supplies come
The competitive market value
will
make
to
long
and structure
level
necessary
capital,
have
difficult
such
in
facilities
is
Independent
financing
individual
integrate
to
risks
suppliers
different
sellers
the
setting
decisions
task.
different
of
allocation
for
but
and
larger
avoided cost) of
quantify
variations
these
and unambiguous way.
already
try
when
not
an
determination
price
efficient
paying
incentives
power system.
have
from
interesting
several
to
involves
production
technologies
supply arrangements
freely
not
is
the
economically
negotiate
that
consumers
affects
in value in a precise
regulators
efficient
different
arise,
I
leads
encourages
that
characteristics,
electric
As
contracts
of issues
set
contract
protects
chosen
structure
buyer to
first
supplies.^*"
dispatchability
the
The
term
encourages
that
variety
a
long
Some mechanism must be found
contracts.
prices
on
to
monopsony power
rely
their
create
together
discussed,
a
as
is
bias
much
reasonable
against
on
possible
as
confidence
third
party
suggest
complexities
contracting
these
allowing
that
the
regulatory
suppliers,
will
that
parties
rules
encourage
to
and
the
an efficient supply mix, and competitive conditions are such
is
not
a serious
source
of distortion. ^^^
Efforts
to
create
a
-51-
environment
regulatory
on
options
to
an
equal
maximize the
and
suppliers
regulation
is
Despite
repowering
of
traditional
supply
tight
of
cost
generating
service
money with
committed
to
under
of
structure
the
suppliers,
an
believe,
quite
believe
the
looking
I
of
some
the
where
area
perception
a
that
is
leads
symmetrical
wholesale
of
gain.
and
New
England
present
time under
credible
redefinition
building
major new
a
to
instructive.
capacity
and
the
at
absence
the
peaking
Massachusetts,
in
regulation
any
of
the
to
that
service
prospect
first
I
any major power plants
In
cost
little
utilities
is,
from
aside
regulation."^
compact,
projects
facilities,
build
to
Massachusetts
in
situation,
generating
old
regulatory
losing
experience
recent
have no plans
generally,
diverse
likely to be especially imperfect.
very
a
party
third
possible
it
with
contracts
into
supply
all
makes
se
bilateral
intervention
evaluate
to
utilities
negotiate
to
and
utilities
for
ownership per
to
regulatory
direct
between
regard
have
utilities
minimize
to
The
of the
flexibility
incentives
without
footing
negotiated
contracts
provides
that
significant
of
therefore
are
Utilities
risk
market (including Canada) for additional
generating capacity to meet future needs.
In
regarding
parallel
systems.
approved
The
amount of new capacity
RFP
and
specifies
future,
standard
the
weighting
criteria
utilities
at
bidding
fuel
that
require
with
price,
the
avoided
approach
utilities
inflation,
utilities
costs
and
propose
for
QF
for
Department
the
except
state,
systems
Public
each
of
rate
to
largest,
Utilities
for
post-
specified
a
required
were
regulator
a
room
for
two
under
using
bids
are
Utilities
of
the
little
seek
to
use
for
left
regulations
operate
capacity
that
interest
to
now
They
once each year.
least
projected
the
in
new
implementing
began
PURPA.^^'
bidding
regulations
contract
buyer's
underlying
the
competitive
"self-scoring"
negotiation.
under
competitive
introduce
to
QFs
of
All
Massachusetts
in
utilities
from
purchases
required
bid
1987,
to
file
(DPU)
an
that
years
into
the
assumptions,
and
the
twenty
evaluate
competing
bids.
-52-
were
Utilities
number of
DPU.
and
and
RFP
the
then
Opportunities
on
severely
permitted
to
continue
by
bids,
with
the
in
suppliers
approval
by
of
however.
the
final
Utilities
were
bidding
the
amount of
the
against
group.
the
of
outside
count
not
award
the
in
conditions
QFs
with
way did
this
large
a
rank the bids, select an award
process,
contracts
for
factors
ultimate
to
and
terms
bidding
the
negotiate
purchased
capacity
seek
price-related
limited
to
subject
attributes,
utilities
weighting
define
to
contracts
final
negotiate
are
but
approved,
is
contracts
process,
contractual
negotiated
to
freedom
considerable
supplier
Once
group
given
capacity they were required to put up for bids.
The
largest
from the bidding
from
utility
QFs using
supported
is
requests
commitment
purchasers
New
in
to
sell
opportunities
MECO
agreed
and
bidding
regarding
7
contracts
negotiation
the
for
that
would
purchase
than
rather
first
Two
power from
under the highly
The company
by the commission.
parties
"wheel
to
when
QF
out"
located
sellers
not
work
utilities
all
the
expected
1987.
third
willingness
the
consummated
in
proposed
from
about
for
results
own choosing
to
in
its
offered
the
supplies
territory
to
most
the
other
had
well.
In
return
for
and evaluate data on contracts consummated
collect
views
continue
to
good prior experience with negotiation with QFs,
its
so
be given an experimental exemption
it
it
exemption
experimental
an
sought
utility
competing
view that self-scording bidding systems affording limited
its
negotiation
lists
its
negotiation
to
their
The
Table
for
allow
system
on
England
and
to,
would
purchasing
supply sources,
attractive
proposed that
bidding
based
to
(MECO)
state
system of their
negotiation
a
"self-scoring"
buyers
which
rules
structured
its
MECO
rules.
bidding
the
the
in
real
by
sets
and
strengths
year
of
levelized
the
in
prices
of prices are
to
survey
weaknesses
of
the
Massachusetts
the
Massachusetts
and
state
this
exemption
through
QF
both
developers
different
experiment are
systems.
now
in.
and the capacity offered for the 23
utilities
listed.
through
either
In each case the
bidding
or
price indicated
-53-
the
is
levelized
provisions
escalation
Boston
using
The second
Table 8
lists
price
things
several
are
Tables
in
and
7
The mean
prices
Second,
of
projects
capacity
the
contracts. ^^^
operating
40%
of
rank
the
fuel
MECO's
interest
assumptions.
fall
within
of
variety
of
from
with
national
and
sizes
Mw
100
supplied
capacity.^**
of
Finally,
narrow
fairly
cents/kWh
5.6
involved
projects
Of
data.
rates,
project
the
chosen.
Mw
100
that
assumptions
NUG
2,449
possible
makes
one
that
projects
accounted for
not
is
it
23
the
in
to
about
For example the project that had the lowest
etc.
assumptions
Similarly,
clear
is
it
were
fuels
and
more account for about 70%
or
the
underlying
the
BECO's
under
a
cents/kWh and
5.2
information
the
had
the
highest
that
had
the
expected
third
price
under
price
under
lowest
assumptions had the ninth lowest price under BECO's assumptions.
provisions
provides
8
contained
plus
escalation
and
a
vary
changes
(oil,
in
for
information
23
the
in
(BPE)
formula
provisions
indices
prices
are
from
note
to
58 projects with capacity greater than
interest
assumptions.
Table
to
be
independently
prices,
interesting
contracts
wide
a
consistent
is
NUG
total
price
MECO's
MECO's
the
values
and
prices
fuel
using
calculations
expected
the
capacities
will
the
1987,
in
expected
that
This
projects
future
future
these
calculates
series
given
contract
the
and 5.73 respectively) with standard deviations of 0.61
However, the 5 projects with
of
23
the
for
are
that
First,
8.
(median 5.01
respectively
0.64.*^*
about
makes these
series
price
first
assumptions
of
life
other attributes of the contracts and the associated projects.
There
band.
the
The
contract.
(BECO)
Edison's
rates.
reported
the
in
over
price
exp>ected
real
adjusting
gas
CFI
and
or
provisions;
that
price
from contract
the
coal)
the
Most
contracts.
adjustment
significantly
the
about
in
GNP
the
the
over
to
nature
of
the
contract
time.
contract.
deflator.
adjustment
Others
of
contracts
specifies
The
Some
formulas.
have
an
price
initial
price
index
various
The
base
adjustment
specific
contracts
include
adjustment
price
the
fuel
specific
prices
price
price
-54-
adjustment
contracts. ^^^
supply
fuel
adjustment
price
concerns
probability
that
agreement
to
the
hypothesized
of
importance
are
the
associated
to
not
intensive
buyers,
being
built
seller
with
buyer
significant
a
performing
stop
to
is
clear
on
the
much
over
allocate
will
the
These
on
most of
take
and
possible
is
it
risks
implicit
that
for
in
larger
that
projects
the
performance
the
more of the construction and
of
more
operating
that
textbook cost
"ideal"
from
regulation.
generally
project
the
While
time.
service
sellers
of
costs
allocation
from
different
of
cost
of
suppliers
different
far
is
appear
contracts
independent
contracts
these
The
term
long
new
by
textbook
contracts.
facilities
that
of
construction
the
projects
is
it
the
Schmalensee,^^*
nature
with
plus
cost
with
of
availability)
capital
the
investments
the
associated
pure
contracts
and
securing
in
contract
implicit
(i.e.
of
market
a
like
create
that
own
their
in
consistent
are
provisions
pricing
interest
Joskow
by
However,
service.
risks
provisions
pricing
anything
has
contracts
the
provisions
reflect
sellers
economic conditions change over time.^^*
as
generation
the
in
the
of
have
not
be
will
it
one
of
These
contracts
As
be
Only
provision.
the
that
by some
chosen
provisions
are
risk
now
of service
regulation.
This
benefits
experience
of
negotiation
highly
helps
also
bidding
structured
systems.
Utilities
that
no evidence
they can
way.
build
Buyers
wheeling service
half of
the
also
to
that
appear
move
contracts
wheeling arrangements.
third
are
utilities
themselves.
to
systems
party
trying
there
If
have
contract
signed
some
had
is
light
bias
it
aggressively
exclusively
.
utilities
utility
in
to
There
parties
is
so
probably goes the other
so
difficulty
and
costs
competitive
flexible
moved
almost
here
power from one
by Massachusetts
relative
avoid buying from third
to
little
the
clearly
supplies
a
on
more
vs.
have
Massachusetts
in
meet pressing capacity needs with
certainly
shed
to
to
1987
far
in
another.
arranging
for
More than
were accompanied by
This means that suppliers which are tied to a specific
site.
-55-
can
seek
still
This
utility.
otherwise
for
to
This
contracts
the
turn
in
reported
were consummated through
bidding
expected
"bid"
we
them
can
no
find
monopsony
exercise
in
between
difference
Thus,
prices
real
independent
survey
of
flexibility
less
buy
and
found
approach
A
from
that
they
highly
local
might
estimated
prices
by whether they
statistical
showed
system
less
the
to
the
the
to
utility
local
of
analysis
no
significant
characteristics.^'"
contract
other
negotiation
a
the
just
affected
be
to
contracts
for
that
developers
negotiation
the
not
that
fact
negotiation.
"negotiated"
here
pay
QF
of
than
rather
controlling
evidence
the
do not appear
7
vs.
after
power,
and
buyers
with
consistent
is
Table
in
competing
to
any monopsony power that
diminishes
certainly
have.
capacity
their
sell
allows
to
utilities
an
Furthermore,
QFs.
preferred
generally
bidding
structured
the
system,
although they had numerous suggestions for improvement in both approaches. ^'^
At the very
to
be
On
approach.
to
to
bidding
a
bidding
with attributes such as
utility
on
rely
hand
other
a
there
systems.
flexible
are
competitive
there
appears
negotiation/yardstick
with
problems
practical
clear
MECO's
These problems may already
be
rigid
self-
coming home
Boston Edison, the company farthest along with a highly
Massachusetts.
in
structured
n^
the
competitive
roost
for
reason
little
scoring
least,
system
with
little
room
for
negotiation,
bilateral
has
run
into
problems with several of the projects that were selected through bidding.^"
THE IMPACT OF THE PURPA EXPERIENCE
PURPA's
long
likely
measured solely by looking
much money
Whatever
suppliers.
PURPA
utilities
has
generation
been
supply
have
its
a
term
how much QF
at
saved
original
sort
stimulated
on
effects
of
by
(or
lost)
intent,
capacity
by
power industry cannot be
electric
has
increasing
been forthcoming or how
their
reliance
independent
and despite numerous implentation problems,
experiment
pricing
the
with
partial
arrangements
deregulation
that
are
not
of
tied
entry
directly
into
to
-56
the
accounting
seller's
performance
operating
electricity;
PURPA
into
out
be
to
entry
PURPA?
that
Why
power
service
regulation,
supply
to
supply
we
electricity
at
II
certain
entry
the
contract
to
categories
size
have
sellers
unincumbered
wholesale
to
to
by
generating
of
supplier
of
has
it
restrict
service
contracts,
any
to
Title
initiative,
should
or
and
competitive
for
generating
technology
of
While
expand the opportunities buyers and
compete
to
way
the
wholesale
classes
wholesale
of
cost
willing
is
not
opened
generating
regulatory
conservation
competition.
of
wrong
the
energy
an
has
thai
market
certain
to
Why
or
as
suppliers
satisfactory
restrictions
service
power
bulk
utilities
mutually
negotiate
opener"
unregulated
for
distribution
by
primarily
operate
forthcoming.)
be
will
economical supplies of
and
build
and
cost
under the right
that
provide
to
under
that
supplies
shown
has
who can
shown
also
"can
PURPA
ones
only
construction
substantial
allocate
come forward
will
passed
the
and
generation
specified
seller.
uneconomical
originally
opportunities
with
the
the
has
(It
conditions
was
turned
that
to
not
are
utilities
successfully.
economic
risks
and
independent suppliers
conditions
plants
costs
distribution
utilities?
PURPA
that
power
independent
federal
policies
do
supply
created
who have an
suppliers
the
has
not
that
generation
interest
expand
to
utilities
constituency
They
have
opportunities
efficiency,
at
prices
for
fuel
that
the
been
barriers
active
in
reflect
size
the
to
the
to
of
and
state
producers
restrictions,
competitive
p>ower
expansion
promoting
power
independent
and
independent
incumbent
of
down
breaking
in
sector.
PURPA's
meet
new
a
(IPPs)
compete
to
market value of
the electricity rather than the supplier's accounting cost of service.
There
party supplies
generating
financial
are
given
capacity
pain
many
the
utilities
regulatory
subject
resulting
that
to
from
cost
are
receptive
to
increased
reliance
on
third
problems they have had with building their own
of service
economic
regulation.
conditions
and
As
a
consequence of the
regulatory
decisions
of
the
-57-
many
1970s,
generating
way
As
parties.
of
utilities
business
in
order
to
help
reliance
on
power
as
this
way
a
for
of
outside
utilities
in
like
encouraging
them
competitive
balance
compete
to
third
interest
demand
and
in
some
a
large
among
1990s
the
in
Still
other
to
other
generation
territories
risk
supply
generation
the
into
parties.
supply
to
service
traditional
their
entry
and
supply
from
growing
a
clearly
is
new
building major
to
more of the financial
shift
to
purchased
them
commit themselves
to
there
result
a
number
increased
reluctant
They would
facilities.'"
third
to
quite
are
utilities
without
through
see
utilities
distribution
cost
traditional
of service constraints.
we
Thus,
in
are
non-PURPA
sales
under
goes
beyond
and
wholesale
generating
contract
PURPA
more
gas
contract,
sales
or
on
are
coal
make
contractual
large
cogeneration
alone
generating
loads
fuel
to
obtain
and
of
simply
small
the
market
"PURPA
the
in
tax."
arising directly
status
that
Mw
example.*'*
Other
This
interest
power suppliers
Ocean
FERC
which received
Island,
the
plants.*'^
power.*'*
market
inefficiently
PURPA. "^
restrictions
regulation
service
return,
purchase
have
under
competition
In
to
entering
efficiency
power
Rhode
resale.
independent
470
planned
making
facilities
Power
State
approval for a
designed
burn
to
drawing boards and looking for buyers who are willing
plants
QF
The
for
utilities
sellers
and
market
wholesale
the
encompass non-QF
to
excellent
projects
of
cost
an
commitments
thermal
waiver
is
to
integrated
generally.
in
from both potential buyers and
dedicated
facilities
combined cycle plant located
novel
interest
traditionally
to
QFs under
trade
growing
seeing
on
these
are
that
other
contrived
But for the PURPA's
qualification
facilities
supply
for
we
simply
really
obtained
are
seeing
small
stand-
process
steam
technology,
size
entry
and
competitive
would not be cogenerators, but
The developers would
with
Increasingly
to
like
sources
the
opportunity
without
having
to
to
enter
pay
a
they are willing to give up utility obligations to purchase
from PURPA.
-58-
EVALUATION OF CURRENT TRENDS TOWARD COMPETITIVE PROCl'REMENT OF
GENERATION AND DE-INTEGRATION OF GENERATION?
The
that
to
that
have
of
encouraging
regulatory
contracts
has
been
but
1
more
and
rules
a
think
results
prove
will
pursuant
utilities
risks
price
a
at
We
have
on
the
to
than
less
generating
date.
to
It
clear
is
independent
which
The standard offer
be
to
unworkable
for
the
suppliers
larger
estimate
and
depends
and
on
conditions
of
regulation)
bidding
approach
The
benefits
critically
(price
projects.
these
appear to have
costs
terms
the
of
buyer's
utility
that
competitive
structured
Many
sellers.
particular
in
contract
term contracts
long
to
the
learned
also
under
procedures
The highly
failure.
to
operating
reliance
determined.
are
independent
an
of
Once operating, cogenerators
records*".
availability
the
and
cost
costs.
excellent
third
supply electricity
been able to supply
own supply
its
to
construction
allocate
suppliers
of
market
the
enter
development
the
and regulatory conditions are right third party suppliers are willing
price
the
if
with
some promising and some discouraging
yielded
has
sector
experience
recent
approach
is
better,
that
utilities
have been allowed to use more flexible competitive negotiation approaches appear
be
achieving the
will
out
turn
contract
have
is
to
only
greatest
reinforce
this
one
toward
been
already
evaluation
careful
cooperating
and
success
between
step
terminated
of
the
the
a
project
not
led
of
realism
buyer and
as
experience.
early
and
believe
I
the
further evidence
It
generating
to
power
proposed
seller
is
to
clear
also
make
Many
This
plants.
the
negotiating
that
electricity.
projects
accumulated
is
as
project
a
it
a
contracts
suggests
well
to
as
reality
that
ongoing
is
very
important.
I
am
allocation
competitive
reasonably optimistic
of
resources
that
associated
current developments
with
providing
can help to improve the
electricity
by
market for wholesale power supplies and providing incentives
creating
to
a
utilities
-59-
to
from
provide
when
from
purchases
about
the
potential
significant
and
third
parties
benefits
of
uncertainties
factored
and
generation
There
contracts.
are
could lead to serious problems
a,
party
more
To
norm.^'^
been
regulatory
must
date
issue
in
that
efficiently
of
critics
adequately
long
the
run,
when
expansion
the
whether
is
coordination
create
and
efficiency
of
changes
large
of
utilities
many
with
will
of
the
multiple
interconnected
arrangements
interconnected
function
of
dispatch
coordination
pooling
that
exist
to
of
a
large
existing
have
to
and
facilities
under
to
reliability.
rigidities
and
How
competing
imjjerfections
will
a
relies
has
small,
quite
generation
short
period
real
of
on
extensively
ownership,
time
through
power
extensive
cooperation
among
well
these
ownership
players
suppliers
been
has
"backbone"
common
make an interconnected
number of competing wholesale power
contractual
and
problems
other hand the
the
still
system
separate
agreements,
independent
made
power
under
units
maintain
more
electric
generating
bilateral
to
be
existing
third
and distribution are
is
integrated
sector
on
reliance
On
operating
is
NUG
competition
than
rather
the
reliability
transmission
generation,
cooperation
of
increased
has not been a serious problem.
this
advantage
take
to
The
economic
power
wholesale
of
and transmission system, and most projects have operated for only
time.
recogized
be
continue
that
some
are
procurement of new
the
conditions
barriers
independent generating capacity that
of
able
and
there
that
that
optimistic
they are not removed.
addressed
will,
handled
quantity
affecting
policies
terms
the
common ownership and where
under
the
primary
been
generation
are
that
the
not
has
if
consequences
am
I
SY?tgm PgijabiiitY
Perhaps
argue
of
several
also
term
of public
regulation
the
long
believe
I
ownership
than
rather
While
economical.
changes,
these
their
evolution
the
into
about
more
are
purchase
through
needs
generating
their
work
emerge
will
in
the
electricity
arrangements
system?
system
efficiently?
as
economic
What
with
a
What kinds
conditions
-60-
change
?
This
There
not
is
asymmetric
investment,
power system
electric
and
problems),
firms
of
integration
cf
set
reasons
believe
to
taken
be
uncertainty,
that
coordinating
of
complexities
the
should
they
contracting
minimize
costs
may
favor
Are
.
transmission
there
and
integration,
vertical
an
integrated
distribution
are
that
rider
free
assuming
benefits
significant
seriously.
relationship
and economically (including externality and
reliably
generation,
and
questions
information,
incomplete
integrated
the
silly
economic
good
are
a
that
vertical
to
likely
be
to
by relying on many independent owners and operators of generating plants
foregone
linked to partially integrated utilities with long term contracts?^'°
We
degree
of
supply
precision.
the
is
have
way of answering
no
Extensive
transmission
functions.
integration
distributors
If
empirically
integration
horizontal
Vertical
earth.
question
this
and
vertical
norm everywhere on
generation,
the
least
presently
electricity
in
includes
typically
not
are
the
recent
experiment
that
experience
with
PURPA,
world
just
not
would make a definitive conventional empirical
test
the
has
run
a
at
they
integrated
Aside
tend to rely on long term requirements contracts for the bulk of their needs.
from
any
with
natural
And
feasible.
while contractual and reliability problems have not yet emerged as a serious problem
with
QFs
and
the
little
the U.S., the
in
lack
of
experience to say anything definitive.
The
not
"ideal"
less
that
integration,
(vertical
does
fact
imply
that
we
perfect
In
can't
partial
short,
change
should
be
complete
discouraged
be obtained.
The
its
recent vintage,
failures
provide
too
world has simply not run
the
prove empirically which
integration,
capacity,
contractual
to
would make a definitive empirical
public policy changes can
than
QF
amount of
small
economic shocks that may lead
the natural experiment that
be
relatively
test possible.
industry
organizational
de-integration,
until
the
traditional
etc.)
requisite
mode
dominates
"prooP
and
system has proven to
and the limited experience with independent suppliers, when
a
-61-
fortunately,
definitive
appears
it
opportunities
and
for
environment
that
generation
and
we
are
about
talking
and
horizontal
and
distribution
integration
some mistakes on
b.
creating
utilities
How
extent
the
necessary.
by
buy when
to
distortions
in
Most
gradual
for
incentives
is
it
for
of
independent
efficient
do
to
distribution
of
suppliers
Even
so.
changes
these
extent
the
in
existing
monopoly
the
preclude
to
be
to
their
for
proponents
change
appears
divest
required
UK,^'' or
the
in
capacity.
creating
issue
which
to
by
raised
wholesale
of the
critics
extensive
argue
that
trade
we
changes
regulation
price
determination
price
Non-interventionists
systems.
CEGB)
being
is
debate about QFs,
etc.
to
utilities
vertical
regulatory
right
policy
reforms,
of
a
vertical
to
enter
we make
if
Competitive Are Wholesale Market?
leave
to
as
opportunities
Interventionists
competitive
integrated
generating
public
the
making
without
the
if
increase
the margin, they need not be fatal and are potentially reversible.
Another
with
(the
in
that
economies
relative
the
regulatory
rate
market
the
integration
players
assets,"^
new
owning
the
require
entity
about
contractual
retail
distribution
generation/transmission
other
the
vs.
should
enter
And,
results.
changes
with
proceed
to
promising
yielded
has
to
suppliers
or
negotiation,
suggesting
feasible
None of
created.
is
from
way
integration
bidding,
utilities
party
one
decision
established,
is
be
to
third
horizontal
IPPs,
environment
regulatory
suitable
wholesale
are
wholesale
of
markets
like
myself argue
and
that
reliance
that
on
price
transactions
negotiation
leads
imperfectly
is
sufficiently
or
regulation
even an
associated
is
not
are
bidding
competitive
to
seeing
to
costly
competitive
wholesale market will lead to more efficient outcomes.
I
will
be
elastic
am
quite
supply
attractive
quite
competitive.
of
prices.
that
optimistic
capacity
In
The
that
addition
the
wholesale
PURPA
markets
experience
that
indicates
that
independent power producers are
to
the
supply
offers
obtained
emerging are and
are
in
there
willing
is
to
response
a
fairly
offer
to
at
utility
-62-
offers
that
buy pursuant
tc
excess
are
or
areas
Table
purposes
current
country.
Over
have
transactions
(see
the
to
the
increased
As
1).
subject
the
of
very
fifteen
earlier,
FERC
lose
evidence
markets
power
suggests
are
As
sellers
and
intents
all
extensive
arrangements,
voluntary
result
markets
these
wheeling
of
a
pooling
that
for
most
in
and
buyers
of
benefit
regulation.
and
and
coordination
years,
these
emerged
have
utilities
mutual
the
to
agreements
anecdotal
integrated
past
discussed
I
coordination
the
etc.,
needs
medium term power
markets for short and
active
substantially
only
to
interconnections,
wheeling,
PURPA,
to
quite
often
are
competitive.
evidence
Additional
markets
can
encouraged
like
group of
a
of
types
had
constraints
for
prices
term
short
effect
coordination
—
has
transactions
price
negative
or
perception
1983
FERC
(more
for
flexibility
regulatory
— on
FERC
that
been a binding
not
power
formal
of
relaxation
positive
either
In
bulk
an "experiment"
in
considerable
The
my own
with
consistent
is
provided
unregulated
by FERC.
participate
to
transactions.
obvious
little
This
quantities.^''
which
program)
of
competitiveness
West
the
in
utilities
the
experiment approved
recent
a
in
demonstration
a
certain
the
found
be
regarding
or
prices
of
regulation
constraint
in
short
and medium term coordination markets.
c.
Transmission Access and Pricing
The
number
and
generation
suppliers
may
can
very
that
facilities,
and
the
regulate
the
rates
limited
legal
to
the
from
actual
pricing
areas
for
can
FPA,
market
the
suppliers
of
Since
distribution
a
of the
service.
to
from.
to
related
competing
choose
where
transmission
under the
necessarily
is
potential
characteristics
of transmission
charged
obligation,
and
utility
the
competitive
markets
wholesale
distribution
a
remote
be
in
of
distribution
size
service
transmission
by access
of competition
extent
will
potential
utility
be affected
As things stand now
service,
provide
but
it.
utilities
owns
have
Nevertheless,
FERC
only
a
utilities
-63-
voluntarily
As
negotiate
indicated
I
England
FERC
second
contract
approved
service
in
inhibits
rather
paths
promotes
than
for
wholesale
been
The
time.
in
New
of
results
of
a
transmission
transmission
of
service
appears
regulation
relaxed
since
the
provided
pricing
regulation
trade
of
all
preliminary
flexible
the
FERC
that
utilities
has
power.
allowing
suggests
other
service
QF
for
experiment
West'**
the
with
"wheeling"
extensive
earlier,
provide
to
arrangements
transmission
to
lead to increased trade rather than reduced trade.'"
Transmission
organizational,
and
difficult
jurisdictional,
and
certainly
most
on
the
increased
reliance
discussion
of transmission
make
a
been
of
the
issues
economic
controversial
well
is
more
the
wholesale
with
The
problems
wholesale
service
per
requirements
requirements customers
model for future
between
associated
easily
i£
FERC
with
leading
to
comprehensive
but
paper,
this
transmission
scarce
and
than
and
the
with
the
between
utilities
once
that
and
wholesale
utilities
let
me
pricing
wholesale
or
associated
requirements
has
distribution
of
for
customers
FERC
access
reflect
regulated
transmission
to
wholesale
with
and could serve
the
customers
wheeling of contract power can
be
as
a
requirements
wholesale
with
bulk
associated
obligations
associated
FERC
pricing
demand
of
conditions
and "captive"
problems
the
to
asymmetric
and
the
requirements
problems
to
or
relative
wholesale
terms
the
solutions
is
access
customers
have recently been approved by
suspect
integrated
issues
service
relationships
I
with
contracts
Creative
se.
customers. ^'^
with
power
over
requirements
disputes
associated
requirements
A
markets.
most
the
changes
the
beyond the scope of
controversy
wholesale
transactions.
power
perhaps
is
It
of
aspect
wholesale
economic rents when transmission capacity
power
problems."®
regulatory,
technical,
difficult
raises
here.
historical
with
associated
pricing
competitive
few observations
Most
and
access
relationship
are
solved
resolved,
relatively
would allow for appropriate pricing and contracting for transmission
-64-
Reforms
service.
new
are
FERC's transmission
in
and
state
federal
policies
regulations
pricing
transmission
resolve
to
needed
clearly
are
line
as
and
siting
certification roadblocks.
While
transmission
pricing,
solving
future,
and
growth
changes
wheeling
that
regulatory
obligation.
In
obligations,
trying
"jump
transmission
policies
most
important
target
affecting
entry,
removed
we can
This
market
and
through
the
reform
as
turn
to
any
FERC
remaining
and Congress are taking so
access
the
competitive
utilities
and
transmission
access
by
at
starting
all.
regulatory
Once
transmission
evolution
special
markets
removing
the
any
without
progress
.
supply
to
over
wholesale
no
the
from
results
negotiation
and procurement of generation
pricing
the
controversies
making
for
with
in
The evidence from
competition
of
lots
wholesale
evolvr
to
continuing
before
competitive
start"
regulatory
for
the approach and
is
of
light
prescription
a
is
is
have
will
unnecessary.
is
provided
often
is
to
power
governing
policies
siting
abstract
there
that
public
and
coordination
the
suggest
service
the
in
wholesale
of
in
coherent
obligations,
problems
pricing
programs
bidding
more
that
service
these
competitive
of
believe
I
these
and
I
view
with
the
impediments
impediments are
pricing
problems.
far.
OTHER REGULATORY BARRIERS TO THE DEVELOPMENT OF COMPETmVE
WHOLESALE MARKETS AND EFFICIENT GENERATION PROCUREMENT DECISIONS
a.
The
to
seek
to
incentives
build
a
in
generating
capacity
problem.
Currently
the
utility
are
itself
be treated
dollar
To Trad itional
Alternatives
needs
the
pass-throughs to
has
largely
regulatory
Cost of Service Regulation
to
a
process.
functions of
how
it
Simply requiring
from
only
by
buying
costs
of
purchased
rates.
good contracts with third parties or
negotiate
third
power
these decisions
believes
utilities
parties
contracts
There are few direct incentives
provide for their
to
not
does
are
to
will
pure
pick
the
solve
the
dollar
for
best
mix
-65-
of
contracts,
post
cost
cost
or
of
all
be
the
third
supply
to
decade
so
of
simply
from
integrated
of service
for
carefully
and
regulation
that
has
may
system
compare
to
subjecting
utility
been imposed in the
informed
imperfectly
a
must
utility
regulatory
the
utilities
either
utilities
The
ex
for
from
efficient
themselves
building
potential
the
parties.
third
requiring
burden on
significant
a
be
to
currently
that
needs
with
cost
likely
would be desirable
it
Similarly,
kind
places
generating
opportunities
the
not
is
it
and
review
regulatory
mandate
to
supplier
cost
option.
that
party
construction
past
Furthermore,
future
their
of
threat
perspective
least
preserve
to
the
disallowances.
reliability
purchase
itself
from
aside
regulators
guard
to
against biases toward or against distribution utility ownership of generation.
generating
that
kind
the
If
capacity
in
minimum
cost
different
supply
announced
are
that
has
it
with
utility-owned
efficiency
Commission
regulation
"regulatory
for
facilities. ^'^
the
utilities
also
of
projwsed
contract"
is
generating
with
a
with
The
cost
indicated
that
effectively
utility
that
if
traditional
plants
better
of
point
per
it
cost
to
the
is
service
replace
by negotiating a
specifying
the
of
kinds
Commission
has
for
regulation
that
wants
it
of their future needs
economical
most
it
regulation.
traditional
project
Two
se.
the
to
wants to avoid what
of
make
to
new utility-owned
of service
all
me
to
particular,
incentives
The Commission indicated
option of meeting some or
capacity
In
required.
Massachusetts
base
rate
seems
it
arrangements
which
suggested
traditional
be
treatment
service
abandoned
to
generating
new
been
to
ownership
of
desirable.
distortions
has
cost
going
utilities
of
be
However, the Commission
the
independent
generating
continue to give
provide
that
recently
are
new
selecting
for
work well over the long run
to
traditional
likely
new utility-owned
to
to
have
facilities
that
required
procedures
negotiation
regulation
rate
choice
alternatives
generating
favor are
I
retail
changes are
regulatory
competitive
flexible
that
some changes
changes
of
cost
specific
compensation
choice.
perceives
What
of
as
the
service
pre-approved
arrangements
that
-66-
be
will
ex
The
proposes
an
to
being
signed
with
expected
to
party
bear
construction
This
would thus
costs that
it
A
task
attributes
utilities
risks
return
return
revenues a utility
and
on
those
to
particular,
of
rate
project
alternatives
in
be
will
would
for
a
investment.
receives
from the
Governor
for
of
new
costs
of
from
third
parties,
an
suggested
has
Jersey
the
Rather than getting into the
a
New
power
allowed
supplies,
for
retail
would be based on some index of comparable wholesale power
contracts"
decouple
costs
the
purchased
or
utility
regulatory
would
actual
decouple the
Compensation
the
region.
new
approach
the
by
purposes,
the
writing
In
reliability
expected
other
allocation
risk
region.
and
suitable
by
appointed
force
owned
in
costs
the
in
cost
a
partially
approach.**"
ratemaking
suppliers
yields
similar
has
than
economical
facility
generating
the
that
define
will
actually incurs.^"
alternative
whether
that
third
that
more
be
to
contract
formula
contract
compensation for power produced by the
likely
is
compensation
The regulatory contract
plant.
must convince the Commission
utility
incentive
new
particular
a
utility
build
to
agree
be
how
exactly
ante
determined.
it
with
associated
for
compensation
utility
incurs
for
new
each
new
for
details
power
utility-owned
supplies
generating
supplies
these
by
procurement or
of supply
plant,
from
generally
compensation
tying
this
to
a
representative index of the cost of wholesale power opportunities in the region.
The
practical
issues
can
contracts"
While
be
used
or
for
the
be
to
approach
addressed
provide
wholesale
other
to
have
put
exist
appropriate
been
either
worked
approach
hand,
scheme,
market,
the
I
as
difficulties
and
practice
numerous
with
any
an active wholesale market in the region
benchmarks either for writing "regulatory
proposed,
don't
out
into
developing an appropriate index of regional
Massachusetts
the
competitive
On
must
neither
Both require that there
confidence.
that
of
details
think
can
that
associated
wholesale
work without a
the
with
New
Jersey
trying
to
power
fully
costs.
developed
approach
can.***
an
"ideal"
write
-67-
regulatory
contract
however,
most
likely
be
to
of
the
A
time.**'
of
lot
that
so
actual
accounting
more
effort
must go
with
the
to
ensure
costs
performance
the
that
practical
partially
over
to
traditional
rate
regulation
alternatives
make
the
at
utilities
by
are
governs the
least
individual
to
utilities
recognize,
projects
at
a
in
markets
that
is
provided
incentives
of encouraging
objective
by
incurred
finding
into
process
generating
utility
financial
utility
the
regulation
service
symmetrical
are
level
the
like
power
wholesale
in
power or new
look
approaches
Both
task.
competitive
of
might
contracts
changes are made
if
purchased
of
costs
from
decoupled
realized
such
formidable
a
is
benefits
potential
fully
ratemaking
retail
cost
the
that
recovery
market
competitive
hypothetical
what
simulate
to
supply
efficient
decisions.
Regulatory Barriers To The Development of Competitive Wholesale Markets
b.
And
Efficient Generation Procurement Mechanisms.
There
currently
development
is
on
obligations
utility
or
determination
to
purchase
requirements,
criteria
issued
is
in
generation
of
of
the
from
despite
comF>etitive
these systems are legal under
FERC
regulatory
PURPA.
avoided
Notices
Unfortunately, these
to
The
markets.
encouraging
further
of
barriers
set
first
Several
states
and
standard
costs
there
QFs
the
fact
bidding
still
that
of
prices
yield
that
several
and
negotiation
remains
continue
that
to
contracts
offer
are
that
and
states
either
have
utilities
programs
too
comply
to
some uncertainty regarding whether
PURPA.
of trying
process
to
clarify
bidding systems must meet to be legal under
two
barriers
avoided costs incorrectly, and specify the terms and conditions
implemented
PURPA's
wholesale
Second,
low.
too
successfully
with
relevant
the
other
several
implementation
state
administrative
estimate
high
competitive
with
associated
rely
of
of
exist
Proposed
NOPRs,
in
Rulemaking
its
avoided
PURPA.
(NOPR)
to
conjunction with a related
In
cost
March
achieve
NOPR
rules
this
issued
and
1988,
the
FERC
objective."'
at
the
same
-68-
which
time
producers
among
what
unclear
price
related
alternative
(including
in
we
would
economical
supply
sources
QF
excess
capacity
production.
utility
reasons.
QF
able
to
they
receive
A
wholesale
charged
FPA
has
supplier
the
long
suppliers
using
does
guided
years.
construction
not tied
is
for
wholesale
FERC
on
under
regulation
from
which
utility
term
of
cost
and
be
IPPs
able
generating
to
been
has
Power
FPA
embedded
of
long
supply
options
risks
under
power
(FPA)
rather
supply
jurisdiction
of
PURPA,
have
service
term
wholesale
internal
for
two
primary
suppliers
is
contracts
been
subject to rate
The
"single
been
the
for
rates
facility"
regulated
principles.
is
have
and
prudence reviews.
from
it
price
compensation
the
PURPA.
traditionally
power
or
utilities,
however,
than
most
independent non-
because
accounting
the
to
competitive
a
contracts
be especially
to
turn
to
regulatory
the
seem
QF
appear to mandate cost of service regulation,
regulation
third
utilities
forthcoming
regulation.
reliability
Act
cost
an
as
incentives
plants,
theory)
(in
at
service
QF
wholesale
subject
and
accounting cost of service or to
not a
is
it
PURPA-
unintegrated
integration)
with
to
QF
capacity
cost
their
Federal
traditional
not
to
of
written
negotiation
with
and energy available from proximate
QF
is
inefficient
generation
alternative
dealing
have an obligation to buy
were freed
take
a
like
this
and
bidding
generation--vertical
whether they are
Substantial
Utilities
suppliers
of
FERC NOPR
third
a
amount
in the long run.
array
of
as
Fixing
experiment
this
if
and
expanding opportunities
in
widest
the
construction
Ideally,
plants,
outcomes
interested
among
utility
important.
us
rules. **^
power
indep>endent
enormous
an
utilities
competitive
for
essential
is
and
proposed
allowing
regulation
of
those
proposed
reforms
and
generated
legislators
the
to
to yield efficient
is
choose
to
happen
will
price
to
For
regulators,
state
have
FPA,***
non-QF
of
regulation
the
in
the
regulation
party supplies
have
under
(IPPs)
controversy
is
changes
proposes
While
principle
the
last
by
the
that
fifty
-69-
Absent changes
non-QF independent
for
competitive
wholesale
not
emerge
for
an
because
uncertainty
conditions,
than
service
has
expect
to
service
contract
be
4
traditionally
for
cents
selling
equal
its
with
6
of
do
service
of
at
seller
seller
an
accounting
will
for
unappealing
cost
prospect
current market
buyers
value
satisfied
of
service
of
being
are
less
term
a
a
of
in
4
than
its
on
compensated
with
point
up
whatever
to
supply
the
accounting
actual
its
price
While
time.
to
and
market
maximum
a
in
out
turn
the
entering
contracts
to
could
cost
assume
buyers
are
not
distribution
the
absence of an ex ante commitment
cent
likely
the
of
this,
able
be
will
it
see
cost
the
When
ceiling
contract
cost
accounting
To
each
at
cost
the
to
of
seller
turn
to
utility
service
there
realizes
a
the
prices,
for
his
is
potential
realized
less.
which simply agreed
The
to
many
be
6 cent accounting
costly
less
will
alternatives,
By
accounting cost of service.
of his capacity whichever
with
accounting
the
as
more
nothing
recover
to
considers
price
price
that
market
enters.
that
supplier
a
he
uncertainty
time,
in
realizes
have to charge
of
service
sell
point
buy
potential
service,
the
be quite
the
to
changing
and
life-of-plant
a
before
short
buyers to buy at that price.
interested
cost
free
to
of
of
Given
time,
in
expects
potential
cost
competition.
suppliers
into
utility
because
series
any
at
is
When
so.
a
with
incentives
by regulators, means that an entrant can only
supplier
The
adequate
performance,
any point
viable,
a
provide
associated
risks
entering
distribution
is
under any obligation
to
by
under
independent supplier
cost
costs
not
does
plant
at
defined
but
regulated,
independent
an
been
a
the
costs,
service
accounting
the
to
of
are
regulation
incur
to
allows
cents.
output
his
suppliers
service
cents/kWh,
5
or
of
independent
typical
electricity
will
cost
recover
the
that
power market which includes non-utility generators simply
that
accounting
its
and
production
system
a
efficient,
supplier
about
and condition
terms
and related contractual
rates
wholesale
cost
independent
way
the
in
entrant
the
or
the
costs
potential
entrant
5.5
setting
faces
accounting
pay him
and
might
cents/Kwh.
-70-
This would give him an expected profit of 0.5 cents/Kwh.
However, such a contract
would
whenever
accounting
the
violate
of
cost
service
ceiling
the
supplier's
accounting costs are below 5.5 cents.
we
want
and
meaningful
If
generation
utilities
pursuant
reforms
in
entities
are
much
service
necessary.
regulation,
with
under
regulation
federal
the
FPA
of
these
same way
the
unintegrated
range
or
have
will
into
integrated
partially
characteristics,
with
negotiated
contracts
the
suppliers
risk/reward
of
suppliers
QFs under PURPA.
are
much
in
wide
a
non-QF
of
entry
supply
to
particular,
In
as
competitive
competition
contracts
to
same way
the
encourage
to
be
to
these
treated
They must be exempted from
in
cost of
"non-dominant" long distance telephone
as
companies have been exempted from cost of service regulation by the FCC.
FERC's
and
entry
proposes
that
NOPR
IPP
be
not
will
a
new
subject
FERC
the
contracts
negotiated
by
providing
"relaxed
give
actually
treatment,"
class
provides
of
authority
IPPs,
regulatory
that
subject
self-dealing
obtain
such
discounted)
utility's
to
cost
the
of
to
proposes
a
costs
(properly
FERC
independent
power
producers
(IPPs)--
regulation.
Since
—
formally deregulate
the
Basically,
by
been
have
changes
proposed
the
IPPs
that
To guard
variety
of
do
things,
value
that
discounted),
the
against
init
criteria
the
is
rates
less
seller
in
than
FPA may
the
not
terms and conditions of
referred
have
significant
and would not
monopKsly
ITF
the
or
as
regulatory
not
sn
to
"relaxed
FERC
be just and reasonable by
other
must have an expected
avoided
suppliers.
service
regulation.
on
power
regulatory
to
restrictions
independent
negotiated
contracts
Among
treatment.
of
treatment."
service
NOPR
suppliers
the
market power would be presumed
be
and
utilities
cost
to
way toward removing FPA
long
a
between
contracting
creating
goes
pricing
— ~»
contracts
equal
to
«?.••»
and
to
(properly
the
buying
cannot have dominant control
over the buyer's access to competing suppliers, and the transaction must be between
unaffiliated
entities
(to
avoid
self-dealing
between
a
regulated
distribution
company
-71-
and a wholesale
thrust
affiliate).
While
1
do not agree
makes
a
lot
creates
of
sense.
It
environment
regulatory
a
with
possible
it
uncertain
through
by
case
not
that
makes
present
treatment proposed in the IPP
IPP proposal,
the
utilities
buy from
to
feasible
it
QF
Although
them
for
of
non-QF
and
the
prospects
FERC
**^
time,^*®
consideration
case
of
details
force
integrate
process.
the
at
does
to
utilities
procurement
competitive
quite
for
the
but
IPPs,
do
to
basic
its
it
In
so.
between QFs and non-QF independent suppliers and
particular, -it-*pr6vi3es'"symmetry
makes
of
all
sources
for
of
applications
same
the
kind
the
common
NOPR
IPP
the
accomplish
can
a
in
are
results
of
regulatory
and
regulatory
NOPR.
CONCLUSIONS
It
clear
is
which
arrangements
World
following
emerged
that
the
were
II
poorly
it
adapted
may
industry
power
electric
While
1973.
and
firm
the
that
governed
War
after
me
to
to
very
structure
dealing
well
be
shocks
mobilized
the
arrangements to respond
it,
to
affected
The
it.
became forums through which
The
primary
about
reform
i>Qst
and
the
regulatory
Some of
Others
regulation.
changes
in
the
process
these
(e.g.
rules
regulatory
the
economic turmoil
that
no
regulatory
and
process,
alternative
institutional
oversight
legislative
of
groups could extract economic rents.
this
turmoil
has
of
the
so
provides
it
pernicious
the
help
—
in
to
turn
improved
to
"prudence"
game
been
traditional
This
electricity.
reforms can
of
seek
to
of shocks.
types
similar
system
interest
viability
of
"groups
years
these
of
effects
monopoly suppliers
performance.
of
run
performance
the
integrated
long
interest
25
the
with
would have worked very smoothly when confronted with
these
during
industry
raise
serious
questions
of
regulated
institution
has
led
incentives
to
efforts
to
efficient
for
improve the incentive properties
disallowances)
"hold-ups"
— made
merely
possible
reflect
by
£i
poorly
-72-
defined
economic
changing
and
principles
legal
opportunities
The
conditions.
latter
have
unfortunately
with
associated
rents
reallocate
to
consequences
adverse
for utility investment and operating behavior in the future.
economic
This
providing
of
incentives
generating
and
distribution
to
whether
capacity,
turmoil
regulatory
requirements
distribution
utility
though
without
not
can
suppliers
economically
factor
provide
often
and
without
stimulated
in
problems,
its
served
has
a
least
at
system
reducing
interest
generating
for
market
the
evidence
of
fraction
a
reliability.
has
It
supplies
meet
to
experience,
independent
generation
needs
been
major
clearly
development
the
seek
to
that
utility's
in
opportunities
PURPA
The
provide
interest
economical
expand
to
capacity.
to
promoting
in
and
enter
to
growing
to
most
the
owned,
or
competing independent generation suppliers
for
led
also
secure
to
utilities
purchased
has
independent
an
of
a
generation market.
This
the
an
recent
of
institution
industry
regulated
made
up
distribution/transmission
been
vertically
integrated,
created
QFs does
with
exf>erience
integrated
numerous
of
integrated,
just
monopoly
as
the
enormous
by long term
stresses
contracts.
Vertical
our
experience
with
regulated
had
not
not
vertically
separation
has
not saved
independent
natural
the
gas
industry
economic conditions after
in
suppliers
is
quite
still
1984.
and,
limited
regulatory procedures have been applied, has been quite poor.
The independent generator
little
and
industry
is
by
dominated
on an industry whose primary pieces were linked together
from chaos associated with unanticipated changes
when bad
industry
gas
is
economic turmoil of the 1970s and 1980s would have almost certainly
the
Furthermore,
power
electric
natural
supply
that
definitively
companies
generating
the
if
prove
course
electricity
competing
Even
companies.
of
not
reason
to
try
to
stuff
it
cat
back
is
in.
now
out
Where
of
the
the
states
bag,
however, and
have allowed
adopt sensible competitive bidding and negotiation systems for
NUGs,
the
I
see
utilities
to
results
so
73-
far
have
been
presence
significant
continuing
bring
and
producers
accommodate
both
independent
they
develop
potential
problems
independent
FERC, and
There
is
primary
regulatory
a
still
accommodate
that
suppliers
a
lot
efficient
inevitable mistakes.
well
the
task
movement
of
generation
utilities
do
to
change
and
rely
problems
will
and
state
capacity
made
have
a
more
plenty
of
effective
to
progress
institutional
is
to
and
opportunities
on competing
state
commissions,
along
regulatory
learn
from
perhaps
agencies
based
Several
significant
or
traditional
system
raise.
room
emerge,
the
many
on competing
regulatory
both
to
de-integrated
a
to
of
federal
sensitive
is
not
can
perform
exclusively
to
power
however,
will
a
will
that
utilities
are,
system
imperfections
the
create
power
comes
it
feared
that
There
they
that
independent
for
distribution
for
suppliers.
electric
if
for
the
to
the
than
environment
number of
a
costly
of
class
inevitable
is
it
become
have
suppliers
opportunities
environment
perspective
Perhaps
more
no
The
arrangements.
how
cost
suppliers.
be
will
new
this
industry
more
up
regulatory
about
and
open
to
independent
that
power
electric
a
effectively
reliability
a
create
questions
legitimate
the
in
pressures
to
Now
promising.
quite
these
lines.
environment
quickly
from
to
the
-74-
APPENDIX
DEFINITIONS OF MAJOR TECHNICAL TERMS
The
of
generation
Electricity
electricity.
by
refers
electricity
produced primarily by transforming mechanical energy into
is
electric
energy
This
most frequently accomplished by using
is
pressure
turn
the
turning
shaft
the
in
combustion engine may
transport
generating
frequency and
which
or
water
Falling
and
the
of electricity refers
from
generating
individual
utilities
economical
system
generator.
a
nuclear fuel to produce high
through a turbine to
exhausted
is
in
wind
(hydro),
an
or
the
to
use
plants
with
of high
internal
load
to
thus
coordination
serves
several
of
dispersed
maintain
to
AC
generating
functions;
related
interconnect
centers,
another
one
conductors
voltage
system reliability generally throughout a synchronized
facilitate
transmission
fossil
turn
in
current
electrical
also be used to turn the shaft in a generator.***
electricity
plants
an
create
to
generator.
The transmission
to
shaft
a
The high pressure steam
steam.
producing
of
process
physical
the
to
and
system,
The
facilities.
not
just
a
facilities
used
to
is
it
voltage,
transportation network.
Tlie
move
electricity
where
locations
of
distribution
from
electricity
of
points
refers
and
retail
to
distribution
residential,
may own
all
customers
(a
purchases
supply
of the
fully
utility
is
a
commercial,
generating
or
close
utility
and
that
voltage
transmission
industrial
collectively as retail customers , can purchase electricity
A
lower
with
interconnection
commercial,
residential,
the
to
is
industrial
customers,
fully
integrated
authorized
supply
to
customers.
A
(an
unintegrated
or
partially
to
electricity
at
distribution
distribution
integrated
to
serve
utility)
from other suppliers of generation service for some or
needs
referred
from the network.
and transmission capacity required
to
the
to
lines
distribution
all
or
of
utility).
utility
its
retail
rely
its
on
power
When
a
-75-
distribution
necessary
to
as
serve
to
one
electricity by
of
with
utilities
power
wholesale
transmission
make
no
utilities
own
be
capacity
power
may
distribution
be
utility
"stand-alone"
that
they
Finally,
they
may be
power
the
as
referred
a
is
defined
is
the
of
sale
and
of
(wholesale
electricity
that
distribution
that
also
principle,
in
distribution
the
power companies)
power suppliers
independent
as
by
wholesale
(iointlv-owned
to
of
companies
owned
jointly
are
which
forms
They may,
.
perhaps
but
different
holding
utility
subsidiaries)
which
companies
organized
public
and
subsidiaries
be
separate
or
transactions,
several
are
may
They
take.
subsidiaries
wholesale
There
market
generating
operate
distribution
integrated
wholesale
the
in
sell
other
be
consummate
to
subsidiaries
provide
utilities
to
public.
can
generating
may
own
that
the
to
companies
they
or
energy
or
specifically
sales
transaction
wholesale transaction
electricity
companies
direct
wholesale
capacity
power
supply
to
utility or a "sale-for-resale."*^°
wholesale
excess
party
third
a
purchased
this
A
another
utility to
Suppliers
from
customers
retail
transaction. ^^°
wholesale
a
power
purchases
utility
power
provide
that
.
exclusively to unaffiliated distribution utilities.^'*
Electricity
is
(manufacturing,
production
The
site.
electricity
referred
ways.
turbine,
mining,
occurred
industrial
or
internal
combustion,
hydroelectric
opportunities to
an
(cogeneration)
capacity
may
process
also
make »ome
tales
some
supplies
small
power
such
in
or
versions
of
(industrial
plants
its
of
plant
of
all
This
utility.
variety
a
at
its
is
different
ftandard
power
steam
plants)
produce electricity and heat jointly for use in
or exploit economical
industrial
firm
industrial
from a distribution
build
sites
Historically,
etc.).
accomplished
be
plant
industrial
at
of an
establishment
may simply
or
use
internal
can
It
.
U.S.
companies,
purchasing
than
rather
establishments
Industrial
the
commercial
self-generation
as
for
the
in
transportation
primarily
requirements
to
produced
also
.
to
An
industrial
a
distribution
firm
with
utility.
its
These
own
sales
generating
constitute
-76-
wholesale
defined
firms
transaction
as
with
making
an
their
and,
independent
own
my
using
power
generating
definitions,
producer
capacity
are
sales directly to other retail customers.^**
when
the
it
generally
industrial
supplier
a
utility.
precluded
by the
sells
to
would
be
Industrial
states
from
FOOTNOTES
Mississippi
of
^State
Power Company
Supreme Court of
.
Robertson, dissenting,
'Joskow,
of Public
Process
No.
p.
No.
Mississipi,
'Joskow,
and
Environmental
Regulation,"
Price
Utility
Decisions
"Pricing
P.L.,
Concern:
Journal
Controversies
electric
over
important
the
of
pieces
{wholesale
utilities
companies,
federal
the
transactions),
.
rate
utilities.
had
bases,
and
The second,
complete
emerged
under
first,
role
Justice
Change
this
data
period
the
Federal
the
.
in
the
Vol.
17,
during
act
the
of
1920s
were completed
the
by
'Retail
customers
commercial (30
of
retail
%
are
generally
revenues)
categories.
public authorities, railroads, etc.
led
two
to
Power Act of
1935
rate
bases
value"
transactions
requirements
reporting
very
(FPA),
between
development
of
for
Most
mid-1950s.
holding
utility
of
all
electric
Public
companies
reorganizations
the
utility
a
with "original
Company Act of 1935 (PUHCA),
1930s.
holding
led
that
required
companies
SEC under PUHCA.
grouped
of retail revenues),
time
of
especially
utilities,
the
public
the
electric
mergers,
"fair
Bell
.
of
complex
and
Approach,"
regulation
utility
the Public Utility Holding
reorganization
of
this
and
collection
Behavioral
Spring 1973, pp.
in
electric
continue to be subject to regulation by the
(3%
1989,
4,
Structural
A
Firms:
uniform system of accounts, the replacement of
a
January
Law and Economics
of
regulation
during
The
legislation.
increased
substantially
and
structure
holding
utility
Regulated
of
Management Science
Journal of Economics and
to
57,740,
October 1974, pp. 291-327.
2,
cost"
Commission and Mississippi
Service
Public
1.
"Inflation
P.L.,
Mississippi
v.
al.
et.
into
residential
industrial
The
(27
"other"
%
(40
%
of retail
category
of
retail
revenues),
revenues) and other
includes
itreet
lighting,
^Edison
Electric
1988a,
Institute,
of
Yearbook
Statistical
the
Electric
Utility
lndustrv/1987 . Washington, D.C. (page proofs), Table 56.
'There
of
are
Electric
wholly-owned
are
power
wholesale
investor-owned
New
McGraw-Hill,
Utilities .
that
utilities
200
over
technically
*These
municipal
Bonneville),
and
transmission
1930s
the
in
include
entities
lOU
Agencies,
of
state
generation
their
companies
and
Agencies
and
of
distribution
rely
(e.g.
TVA
of
legislation
rural
and
generation
cooperative
federal
electrification
areas,
passed
and
Many
states.
a
of
on the Federal Power Marketing
and
generation
requirements,
jointly-owned
reduced substantially.
distribution,
the
Directory
consolidating
unintegrated
and authorities established by the
cooperative
or
after
small
consequence
a
subsidize)
districts
utility
lOU's,
part
or
(and
as
is
However,
Marketing
and cooperative distribution systems
public
all
established
facilitate
of public
variety
the
to
cooperative
utilities,
entities
entities
Power
Federal
the
very
ignoring
companies, the number of independent
1988.
holding
of
subsidiaries
and
facilities,
York,
World,
Electric
utilities.
transmission
power
reselling
organizations
for
purchased
from
wholesale
transactions
third
parties to retail customers.
^he
Power
Federal
between
Act
unaffiliated
limits
utilities
(as
regulation
federal
rate
defined
by the Federal Power Act) and between
to
corporate subsidiaries of interstate holding companies.
^°
Primeaux,
Vol.
May
51,
The
Competion:
franchises
creation
exclusive
that
local
a
W.J.,
are
The
Decline
pp.
144-48.
1975,
Natural
In
Electric
Primeaux.
Mvth
Monopoly
non-exclusive,
technically
W.
J.,
While
.
Competition,"
Utility
economic
1986,
in
and
Land Economics .'
Direct
many
states
regulatory
Electric
Utility
electric
utility
barriers
to
the
of directly competing distribution systems give
most incumbents a de facto
geographical areas.
Franchise exclusivity means
franchise
retail
utility
to
customer
or
serve
at
generate
a
specific
given
electricity
location
himself.
must either purchase
In
a
few
areas,
electricity
utilities
from the
do compete
one
with
service
industrial
to
regulatory
State
on
another
the
fringes
facilities
price
but
sites,
competition
this
discrimination
is
extend
to
quite
limited.
impacts
price
the
limit
or
areas
service
established
their
remote
at
on
restrictions
of
any
of
such competition even further.
^'
Energy
Federal
FERC-0049. December,
*'
Energy
Federal
A
Producers:
Commission,
Analysis," Office of
"FERC
Power
Pooling
of
Inouirv
31
FERC
some
Re
Regulation
Regulation
when
or
of
.
Power
Bulk
of
October
Policy,
Power
Independent
"Regulating
1987,
Economic
Coordination
13,
1987,
4-5;
pp.
FERC
Transactions,"
most
reliability
transaction"
the
is
between
transactions
transactions.
It
term
Transmission
and
Sales-For-Resale
Electricity
"Coordination
61,376.
sense
economy
that
integrated
FERC
now makes much
less
is
difficult
industry
generated
lOU's
are
the
of
value
purchases
coordination
to
by
whole
a
as
attributable
measure
to
and
to
other
out
(primarily
utilities
short
term
Calling
these
sense.
For
transactions.
the
that
20%
Roughly
zero.
is
so
made
makes more
coordination
balance
sales
transactions
sold
wholesale
sense.
Service.
It
uses.
were
utilities
transactions something like "voluntary contract transactions" probably
the
States
Working Paper, July 1984; Federal Energy Regulatory Commission, 1985, Notice
Staff
^'It
United
the
in
1981.
Regulatory
Policy
W.C.,
Early,
Commission,
Regulatory
other
net
of
revenue
Kwh
the
lOLTs)
in
the
coordination market.
^*Such
dates.
contracts
often
have
FERC
However,
has
provisions
notice
often
required
termination
for
utilities
to
firm
or
continue
to
termination
provide
service
regardless of contractual termination provisions.
*^The
one
hand
perspective
utility
of
status
wholesale
they
of
takes
are
rate
on
a
requirements
treated
very
customers
much
regulation
and a
wholesale
requirements
utility
like
is
large
retail
customers
obligation
supplier's
customer
On
somewhat ambiguous.
it
is
to
difficult
from
serve.
to
stop
the
the
Once
a
serving
customer even
that
does
utility
and
customers
subject
approved
tariffs.
been
has
and
Raskin,
D.B.,
and
are
that
characterized
wholly-owned
make
companies
19
have
for
owners.
in
So,
vertically
by distribution
a group of
three
operating
created
Electric
—
a
1985
Power
independent
plants
is
(1988)
of
are
and
by
which
The
plants.
one
on
placed
generally
utilities
associated
the
primarily
owned
plants
by distribution
are
these
of
the
joint
and
the remaining companies
that
was
since
distribution
built
to
they
are
is.
owned
a joint venture between
is
provide the requirements of
uranium enrichment plant owned by the E>epartment of energy.
remaining
wholesale
facilities
generating
companies
(combined capacity 21
two
MW)
are
companies
tiny
and one
is
a
company
through the spinoff of excess generating capacity owned by Tucson
Company.
wholesale
to.
In
power
were more common.
they sold power
from
produced
Utilities
Nine
Six
Competitive
Power
companies
utilities.
J. A.
Federal
the
of Electric
holding
jointly-owned
turn
A
In
Under
companies.
utility
distribution
which own a plant
hydroelectric
in
or
Loads
Directory
between
Bouknight,
entities.
Service
generating
transmission
into
One of
utilities.
utilities
these
Wholesale
World's
utilities
in
distribution
take
of the nineteen cases the wholesale power companies are
integrated
Of
1987, pp.
power
the
to
fifteen
customer
8,
affiliated
operating
a single
the
FERC
in
controversy
antitrust
Customer
Wholesale
Provide
of
and
a
competing
contained
provisions
hand,
requirements
among
around
shop
other
the
wholesale
serve
notice
regulatory
to
which are
corporations
responsibility
For
wholesale
as
with
entitlements
ongoing
Electrical
in
subsidiaries
transactions
separate
short
On
term.
to
principle,
generally
"Planning
The Obligation
are
in
cooperatively-owned
.
^®There
contract
franchise
can,
of
subject
the
Energy Law Journal Vol.
Act,"
sites,
exclusive
the
to
the
The terms and conditions under which such shopping can
publicly-
Environment:
facto
only
and
lOU's
an
customers
these
suppliers,
place
have
not
of
conclusion
the
at
the
early
companies,
They
history
typically
generally merged
of
the
created
electric
to
power
develop
with the distribution
industry
hydroelectric
utilities
that
*^If
utility
a
owned by
separate
power
wholesale
the
superficially,
transmission
service
transactions
subject
'^National
the
power
with
Regulatory
of
them along
Commissioners,
FERC's
authority
issue
to
Association
Regulatory
of
least
as
sites
on navigable
amended.
Commissioners,
Utility
On
Report
.
hydroelectric
for
licenses
waterways under the Federal Water Power Act of 1920
'"National
At
distribution
Annual
1986
.
for
and
and
state regulatory authority.
and Carriers Regulation Washington, D.C., 1988, pp 537-549.
^"Except
The
utility
rates.
retail
transmission,
generation,
Utility
distribution
in
be
regulation.
state
the
to
would
subsidiaries
the
than
costs
pass
to
same corporation, maximizes
Association
between
rather
assets
company framework, then
holding
a
FERC
to
purchased
as
integration
vertical
owned by
Utility
and
commission would be obligated
state
assets
within
generation/transmission
and
distribution
subsidiaries
corporate
would appear
prices
transfer
with
organized
generation
of
transfers
is
Annual Report
1986
,
p.
538.
'^Technically,
the
company
new
files
which
rates
by
suspended
then
are
the
commission for some period of time.
''The "used and
in
recent
capacity"
useful"
principle
years
people
have
from
rates.
discussion
Schmalensee,
Regulation
'*Two
.
with
wholesale
1,
allow
M.
a
as
it
W.,
for
rationale
"Public
this
section
Regulation
For
Electric
December
a
use
in
Supreme Court
must
to
and unusual punishment
cruel
to
excluding
"excess
Private
Rights,"
Utilities'
.
follows
"Incentive
recent
commission
that
Vol. 4, No.
tried
McConnell,
RgRVlation. No. 2, 1988, pp.
"The
been subject
has
from
Joskow
and
Utilities,"
Yale
Journal
On
clear
a
state
regulatory
the
costs
associated
1986, pp. 5-8.
decisions
utility
drawn
is
to
make
pass
power purchased pursuant
it
along
to
a
fairly
in
retail
FERC
that
rates
approved
wholesale
tariff
or
General
of
Mississippi,
Narragansett
1359,
may
prices
the
that
however,
,
determines
the
that
Commission
vs.
Burke
.
the
be
able
to
disallow
it
was
imprudent
County
Thornburg
are
seller
&
Light
See
also
Supreme Court,
381
A2d
commission must assume
is,
"just
and reasonable."
of
part
Power
state
enter
to
Co.
power
costs
Public
A2d
if
contract
the
into
465
1983,
commission
state
Pennsylvania
vs.
Court,
A
purchased
the
purchaser
the
for
Island
1988;
24,
(1986).
That
or
all
953
Attorney
June
86-1970,
U.S.
the
Moore.
Rel.
Ex..
No.
476
.
Rhode
(1977)
Commonwealth
Pennsylvania
.
v.
972 (!979).
U.S.
Mississippi
v.
Supreme Court,
Co.
by
Pike
Co.
U.S.
.
charged
place.
first
435
Light
a!.
Light
Co.
Electric
denied.
cert,
et.
&
Power
Nanatahala
&
Power
Mississippi
contract.
it
in
Utility
The
735.
circumstances under which a state can do so are uncertain.
'^
Smvth
Ames
V.
Gas Company
Natural
U.S.
et. al.
'^National
429 and
Myers,
R.
of
Regulatory
mimeo, September, 1987, and
S.C.
generally
1985,
et.al. .
"Inflation
et. al. v.
National
et.
al.
v.
Barasch
Annual
1986
Report
,
p.
2.,
Barasch
the references he cites.
and
Rate-of-Retum
U.S.
et. al.
Association
.
^
of
Regulatory
the
transaction
Research
Regulation,"
and the references they
pp.
Under Rate of Return
Profitability
In
cite.
January
Utility
11,
1989
Commissioners,
1986
Rer>ort.
'^The typical approach
accounting
to
Commissioners,
Utility
"A Note On Etepreciation and
'^DuQuesne Light Co.
him
PuQuesne Light Co.
(1944),
Hope
v.
^(January 11, 1989).
Transportation Economics, Vol.
Annual
Commission
Power
Federal
(1968).
p. 461.
Regulation,"
***See
790
747,
U.S.
320 U.S. 591
.
Association
'^Schmalensee,
"
169
.
costs
sign
a
to
is
yield
contract
to
a
in
structure
price
that
competition
is
sufficiently
with
other
in
such a way as to get
attractive
third
party
to
the
the
buyer to get
suppliers
or
internal
production
that
by
associates
it
yield the prices that the buyer
"Joskow,
Electric
and
P.L.
is
by structuring
contract
the
whose accounting
plants
so
costs
willing to pay.
Schmalensee,
Deregulation
Utility
accomplished
be
with a mix of generating
output
the
can
This
buyer.
the
R.,
MIT
.
Markets
1983,
survey
Press
the
An
Power
For
literature
and
Analysis
analyze
of
several
"deregulation" scenarios.
" Ibid.
,
pp. 25-78, for a
more extensive discussion of
monopoly
the natural
issue.
'^Ibid. pp. 59-77.
'^Joskow,
and
P.L.
Experience
and
Rose,
N.L.,
Environmental
"The
1985,
Regulation
on
Effects
Construction
the
Generating Units," Rand Journal of Economics
.
Vol.
16,
No.
Change,
Technological
of
1.,
Cost
Coal-Burning
of
1-27; Joskow and
pp.
Schmalensee, Markets For Power pp. 45-58.
,
*^Joskow and Schmalensee, Markets For Power pp. 59-77.
,
^^Ibid.. pp. 62-77.
**That
is,
large
most
efficient
their
full
vertically
organization
selection
properties
to depart
from
'^Partial
but
potential,
of
monopoly
form
the
the
for
combination
and
competition
production
of
may
suppliers
of
monopoly
imperfect
electricity
insulated
regulation
be
theoretically
lead
i£
the
they
achieve
the
natural
from
actual
performance
this theoretical ideal.
of
de-integration
concentration
integrated
at
mergers.
Indeed,
systems,
combined
pricing,
may
the
and
transmission
expanding
with
facilitate
generation
distribution
the
boundaries
of
suitable
provisions
for
economical
and
generation from transmission and distribution.
reliable
with
inconsistent
not
is
levels,
horizontal
wholesale
for
control
example
over
transmission
de-integration
increased
of
through
transmission
access
ownership
and
og
*°In
regard
this
industry
have
much
the
the
that
natural
this
number of
smaller
arrangements
cooperative
out
point
with
inconsistent
is
a
should
I
large
involving
current
monopoly
multiple
story.
If
integrated
vertically
have
utilities
of
structure
the
A
utilities.
been
we would
were,
it
power
electric
variety
introduced
to
of
achieve
economies of scale and coordination available from electricity supply technology.
There
through
doubt
little
is
mergers
my mind
in
These
lOUs.
of
that
there
mergers
opportunities
are
have
not
to
reduce
state
and
Practice:
An
because
occurred
costs
federal regulation place direct and indirect restrictions on them.
*^Joskow,
Overview,"
Joskow
R.
and
P.L.
R.
Noll,
G. Fromm, ed. Studies
in
P.L.,
^^Gollop
F.
in
in
Public Regulation
.
Theory
MIT
and
Press;
and Rose, N.L. (forthcoming), "The Effects of Economic Regulation,"
in
Volume
2,
Schmalensee and R. Willig,
North Holland
"Regulation
1981,
Press;
eds..
Handbook of
Organization
Industrial
Joskow and Schmalensee, Markets For Power
.
.
and Karlson, S.H., "The Impact of Fuel Adjustment Mechanisms On
H.
Economic Efficiency," Review of Economics and
Vo.
Statistics .
November
60,
1978,
pp. 574-584.
*'Klevorick,
Review,"
Bell Journal of
"Greene,
in
a
W.H.,
Period
Performan ce
Publishers,
Effectiveness
Behavior
"The
A.K.,
and
Subject
.
Smiley,
Changing
of
Public
R.H.,
Electric
1984,
"The
Smiley,
Utility
Concepts
R.H.
and
Regulation,"
To
Stochastic
Regulatory
of
Regulation
.
Effectiveness
Economic Conditions,"
Enterprises:
Amsterdam;
1983. pp. 65-81.
Firms
Economics Spring, 1973, pp.
of
of
of
in
and
Utility
M. Marchand,
Measurement
Greene,
Resources
W.H.,
and
.
et.al.
Elsevier
eds,
The
Science
"Determinants
of
Energy
5,
.
Vol.
*^Federal
Energy
Producers,"
pp.
Energy
1987.
Regulatory
14-23
and
references
the
A
Security:
Commission,
Report
cited
To The
President
done
early
Department
U.S.
there;
of
Power
Independent
"Regulating
United
the
of
Energy,
States.
DOE/S-
0057, March., pp. 130-160.
*®We
can
work
some
find
For
Power
electric
utility
and
Schmalensee,
Markets
for
reorganizing
the
could
utilities
owning
of
instead
These
regulation.
into
generating
carrier"
transmission
monopoly
distributors
the
current
For
more
Schmalensee,
Wholesale
and
Electricity
up
subject
the
distribution
of
the
electric
regarding
Golub,
G.
Markets,"
power
compretition
"Estimating
Rand
service
power
Economics
"Incentive
Regulation
.
industry
"common
interactions
between
model
lies
power
Vol.
in
15,
behind
Kingdom.
United
the
Concentration
of
Journal
of
a
wholesale
Effective
service
with
This
in
distribution
cost
sectors
industry
in
possibilities
generation
to
competitive
facilitating
the
electric
competing generating companies.
work
and
R.
of
Joskow
in
unintegrated
suppliers
breaking
and
explored
that
that
themselves
capacity
system
so
unregulated
transmission
reorganization
recent
industry
(discussed
1960s
the
as
179-198)
pp.
envisioned
studies
generation,
separate
as
,
competing
on
rely
being
markets
see
E>eregulated
Spring
1984,
pp. 12-26.
*^Joskow
P.L.
Yale Journal
**There
On
has
and
Schmalensee,
R.,
Regulation Volume
.
also
been
They have met with
little
pressure
4,
No.
exerted
success and
I
1,
by
For
Electric
Utilities,"
December, 1986, pp. 1-49.
industrial
customers
for
retail
will not discuss this issue further here,
wheeling.
citations.
**Joskow, "Inflation and Environmental Concern."
'"Gollop
and
Roberts,
of Technological Change."
"Environment
Regulations,",
Joskow
and
Rose,
The
Effects
'^Between
and
1960
1973
compound
annual
the
growth
of
rate
in
electricity
Between 1973 and 1985, the annual compound
consumption was 7.3% per year.
rate
of growth of electricity consumption was 2.5% per year.
''a
generating
uncertainty
thumb
its
of
for
a
a
neighbors
construction
P.L,
and
maintain
utility
modern
is
periods,
P.L.,
that
utility
20%.
Since
and
a
is
demand
reserve
capacity
uncertain,
by the peak
nominal
on
load
As
equipment outages,
unscheduled
and
interconnected
is
utility's
meet exp>ected peak demands.
to
maintaining
significant
generating
a
high
level
A
very
able
to
margin.
with and
investments
reserve
actual
are
of
reliability
rough rule of
coordinate
lumpy,
margins
have
will
with
long
generally
this target.
"Productivity
Growth
The Energy Journal
Schmalensee,
1,
etc.
the
divided
system
the
scheduled
schedules,
R,
.
and
Vol.
1987,
Generating Units In The United
Vol. 2, No.
on
load
between
difference
the
to
demands,
uncertain
be higher or lower than
Electricity,"
peak
the
construction
in
that
"Joskow,
equal
is
Generating capacity must be built
consequence
reauires
and
capacity
the system.
a
margin
reserve
utility's
8,
"The
States:
Change
Technical
No.
1,
January
Performance
1983,
of
Generation
the
in
17-38;
pp.
Coal-Burning
1960-1980," Journal of Applied
of
Joskow,
Electric
Econometrics
.
April 1987, pp. 85-109.
"Joskow (1987)
'^Joskow, "Inflation and Environmental Concern."
**TTiis
excludes automatic price increases associated with fuel adjustment clauses.
'^Nominal
Edison
electricity
Electric
prices
Institute.
Washington, D.C., 1974.
declined
Historical
continuously
Statistics
from
of
at
the
least
1925
Electric
until
Utility
1970.
See
Industry.
theory
^*In
a
if
and allows
a
should
equal
be
implies
than
means
exactly
its
Due
one.
to
the
equity
nominal cost of capital,
typical
a
A
on
ratio
tax
that
greater
more than
significantly
one
than
less
investment
its
significantly
ratio
earn
to
price/book
return
price/book
utility
income
certain
working "perfectly," the price/book
is
a
base
rate
cost
price/book ratio
the
of
normalization
utility.
earn
to
A
capital.
original
depreciated
a
regulation
if
a
expects
on
mandatory
to
expected
is
market
the
for
1.1
utility
of
cost
that
earn
to
about
be
that
its
relies
ratemaking purposes,
should
ratio
agency
utility
for
benefits
regulatory
is
less
than
one
cost
its
of
equity capital.
utilities
Accounting
Standards
Of
commissions.
In
most
particular
in
utilities
are
the
base
rate
allowed
to
or
construction
(AFUE>C)
credits
reduce
book
credits
are
it is
net
completed and placed
*^he
improvements
industry
as
story.
As
a
major
rates
utilities
benefitted
contemporary
reflect
that
lower
still
treatment
the
after
non-cash
credits
roughly
capacity
once
regulatory
costs.
as
SEC,
FERC
of
allowances
called
and
increase
part
of the cost of the
equity
it.
state
work
used
These
earnings.
AFUDC
returns.
when (and
plant
in
However,
funds
for
equity
and
book
and
under construction.
some
include
Financial
the
construction
include
to
to
by
of plant
expenses
interest
financial
generation
declined,
interest
allowed
costs
the
issued
if)
in rate base.
in
whole
only
interest
by
permitted
are
against
rules
treatment
the
not
and included
capitalized
is
are
book
during
adopted
as
importance
utilities
accounting
special
(FASB)
Board
jurisdictions
progress
under
operate
^''Regulated
again
Improved
observed
consistent
with
construction
programs
ended,
1984
utilization
regulatory
have
been
financial
and
increased,
lag.
quicker
health
electric
resistance
prices
declined,
general
inflation
app>car,
rate
universal,
utility
regulatory
fuel
require
to
not
is
the
does
It
the
for
is
from
agencies
health
abated,
however,
adjustments
however.
that
to
Utilities
have incomplete nuclear projects, or have not yet resolved the ratemaking
of
recently
completed
nuclear
plants,
exhibit
poor
financial
performance
as
do
with
utilities
good
with
customers
self-generation
Company
Indiana Public Service
Association
**National
amount
significant
a
Gulf
and/or
capacity
excess
opportunities.
and
Utilities
States
industrial
Northern
are good examples.
Regulatory
of
of
Commissioners,
Utility
1986
Annual
Report
,
p.
417.
^'Automatic
adjustment
fuel
of
clauses
cushioned
course
the
of
this
"Inflation
and
effects
regulatory lag of course.
^Joskow,
Decisions
"Pricing
Regulated
of
Joskow,
and
Firms,"
Environmental Concern," pp. 305-311.
^Myers
*^An
"Inflation and Rate of
et. al,
would
alternative
have
Return Regulation."
been
some
allow
to
or
of
all
work
construction
in
progress in the rate base.
®^Joskow and Schmalensee, "Incentive Regulation For Electric
should
*^It
under
be
that
assumption
the
eventually
some
some
abandoned,
after
1979
in
response
demand, and
financial
construction
misleading
to
construction
back
out
of
look
were
coal
expensive
only
at
and
oil
sunk
substantial
Mile
and
delayed
nominal
nuclear
gas
appear
costs
reserve
generating
fired
were
or
to
high
Accident,
units
plants
generation,
was
rather
pipeline
were
had
been
have taken
were
that
as
In
Most
made.
interest
abandoned
margins.
higher
in
by 1975 were eventually
utilities
expenditures
Roughly 80 coal
cither
spent
expenditures
construction
Island
they
that
planning/construction
the
construction
difficulties.
cycle
anything
announced by
plants
Three
in
substantial
substantial
the
to
keep pumping out generating plants
just
recover
were
after
abandonments involving
the
that
Roughly 100 nuclear
incurred.
not
could
they
plants
cancelled,
did
utilities
that
Many power
rates.
or
noted
Utilities."
in
the
economically
to
It
cases
after
declining
rates,
well.
many
than
place
planning
is
also
continued
justified
meet
of
short
to
run
capacity
The
needs.
economic calculus
significantly.
^ The
Investment
Prudent
of
collapse
and
oil
Test
natural
1980s
the
in
Regulatory
National
.
changed
1985
after
prices
gas
this
Research
Columbus, Ohio, April 1985.
Institute,
** Federal
Energy
Regulations
Governing Independent Power Producers
Commission,
Regulatory
Notice
Re
Rulemaking
Proposed
of
Docket No. RM88-4-000, March
.
16, 1988, p. 13.
Energy
^"Federal
Producers,"
A.
Kahn
Nuclear
13-21,
pp.
and
Regulatory
L.
Department
The
Perl,
Historical
(mimeo).
1985
Plants,"
U.S.
Power Plant Cancellations," Public
^'McConnell, "Public
''An
examination
makes
utilities
plants,
of
units
Council.
1988
D.
Bargain
Security ,
and
September
1,
154-157,
pp.
Treatment
the
"Regulatory
et.al.
Utilities Fortnightly .
capacity
generating
quite
clear.
are
building
that
generating
Regulatory
Hearth,
Energy
Energy,
of
Power
Independent
"Regulating
Issues
of
Nuclear
in
1988.
Utilities' Private Rights."
this
utilities
Commission,
than
they
Electric
that
from
Aside
anything
did
SuppIv
in
and
is
unlicensed
generally
are
the
constructed
being
by
nuclear
much
smaller
Electric
1988-1997
For
planned
incomplete
building
National
past.
Demand
or
or
.
Reliability
Princeton,
N.J.,
October, 1988.
"U.S.
Department
Regulatory
Energy
Energy,
of
Commission,
"Regulating
Security ,
Independent
pp.
Power
154-157,
Producers,"
Federal
pp.
Energy
13-23
and
the references they cite.
'^Federal
Energy
Producers,"
pp.
9-23
Regulatory
and
Energy Security pp. 154-160.
,
the
Commission,
references
cited
"Regulating
there;
U.S.
Independent
Department
of
Power
Energy,
Low
'^"Unprecedentedly
Energy
Daily
Tripling
September
.
What
"NEPOOL
Industry
1988,
7,
p.
Predicted,"
Margin
Capacity
Electric
Worsening
p. 18.
^^(PURPA) Public Law 95-617 (H.R.
4018),
.
Joskow,
"The
P.L.,
Public
19,
^*Parmesano,
"The
.
Ratemaking:
Hethie,
A
Survey,"
Power
Electric
P.L.
and
The Energy Journal
•''Not
other
to
Vol. 4, No.
.
exceed 80
qualifying
D.,
Mw
in
fuels.
1,
the
Utility
Regulatory
.
1986, Chapter 5.
"18 CFR 292
17,
1988,
p.
of
1;
E>evelopment,"
Natural
1978,"
EPRI EM-5705, March
Economics
Simple
Avoided
and
Marginal
Power
Costs
November,
Associates,
Electric
(1988)
"The
Research
in
1987;
Institute,
1988.
of
Industrial
Cogeneration,"
January 1983, pp. 1-22.
of garbage burners and
case
There
Policy
of Energy, "Emerging Issues in
1987,
Power
Act
Policy
Research
is
no
restriction
cogenerators and several such facilities exceed 300
^Public
From
9, 1978.
of
Economic
Institute
Jones,
Nature
and
Role
Innovative Rate Design Survey: 1986
^^Joskow,
6.2%
October
Small
Th^
1979, pp. 787-809.
National
Research
November
Regulatory
Utility
Autumn
Resources Journal Vol.
More
CEA,"
U.S.
Up
Peak
Week.
Utility
Despite
Warns
Ahead,
"Nationwide
4;
Coeeneration Report April 22, 1988,
"
Margins
Reserve
Electric
Act
PURPA
of
on
30
the
Mw
size
in
of
the
case
of
qualifying
Mw.
1978,
Section
Implementation,"
210(d);
U^. Department
DOE/PE-70404-H1, March,
CFR
*'18
and
statute
amount
the
rule
require
to
American Paper
had the authority
However,
appeal
the
original
individual
negotiate
be
that
to
the
recently
equal
anticipate
that
avoided
the
agency
if
ruled
that
mutually
a
and
available
rule
satisfactory
cannot
utilities
utility's
QFs
large
exact
the
they
In
costs.
Supreme Court held
buying
the
cost
avoided
their
to
the
because
challenged
402 (1983) the
to
with
were
or
floor,
a
ceiling,
rules
prices
U.S.
a
whether
about
controversy
payments up
clearly
rules
regulatory
FERC
461
require
to
contracts
state
negotiated.
AEP
V.
as
initial
pay
utilities
ongoing
cost
FERC's
pay.
Institute
been
has
avoided
establish
must
utilities
appeared
FERC
There
292.101(a)(6).
be
avoided
leverage
as
contract
to
could
pay
FERC
than avoided cost by the states (Orange and Rockland Utilities
cost.
would
utilities
required
that
to
not
more
(1988)).
"^Conference Report on H.R. 4018, Public Utility Regulatory Policy Act of 1978, H.
Rep. No. 1750, 95th Congress, 2nd Session, 1978.
*'While
PURPA
Uncertainty
was passed
over
the
key
in
1978,
late
pricing
FERC
**I
would estimate 1989
'^Primarily
small
NUG
not
contained
provisions
resolved until 1983 in American Paper Institute
did
v.
AEP
.
capacity at roughly 32,000
op.
issue
in
regulations
regulations
these
1980.
until
was
not
cit.
MW.
hydro plants, wind turbines, and steam plants fueled by wood and
municipal waste.
**The
after
and
federal
1978,
just
estimates.
government
as
PURPA
The data
cleverly
stopped
was passed.
for
1985
and
collecting
Since then
1986
are
data
systematic
we have had
based
on
to
rely
on
NUGs
on surveys
comprehensive
Electric Institute (EEI) surveys and are consistent with other surveys and estimates.
Edison
example,
*®For
it
Total
1986.
was
the
was half of what
industries
and
1981
in
used
electricity
Survey of Manufacturers various
American
*°North
Bailly
Coeeneration
Report
extent
the
revealed
April
.
assuming
an
around
the
more
it
to
integrated
and
these
incentives.
building
a
"l
hard
it
decision
reported
as
figures
However,
modern
also
in
mask wide
in
the
certainly
distortions
utilization
integration
regulation
rate
almost
is
it
input
vertical
since
state
effect
through
than
rather
Better
plant
developments
regulatory
buy
to
yourself.
to
from
a
the
in
ubiquitous
is
there
U.S.,
is
not
shoul;d
be
have
decade
past
than
party
third
effect
Tliis
empirical
or
buyer
costs
production.
public
has
market
of
The
supply
elasticity,
ability
of
the
power,
policy
extent
the
buyer
of
attention,
output,
elasticity
to
will
the
primary
subject
a
power
producing
The
se.
is
money
lose
to
confused
with
arising
from
associated
with
be
price
the
purchases
reducing
discriminate,
the
demand
and
of
the
buyer's
the
input
for
various
theoretical,
little
which
over
inputs
This
restricted.
depends on
derived
concern
received
has
artificially
while
inefficiencies
efficiency
that
that
restriction
of
about
excited
terribly
get
monopsony power per
monopsony
social
The aggregate
13..
p.
Base,
I>ata
.
monopsony power.
classical
the
Power
Small
Demand
and
Supply
1988
Averch-Johnson
an
is
discussed,
generating
find
utility
was only 20% of what
than the A-J effect.
changed
classical
1981
capacity and generation.
preceded
just
I
and
1988,
firm.
have
"*As
22,
NUG
own/buy
world
between
decline
to
1986
in
Council,
Reliability
there
that
the
in
Primary Metals
in
Cogeneration
interregional differences in
'^To
continued
It
metals
years.
Electric
RCG/Hagler,
1971.
in
primary
the
Department of Commerce, Census of Manufacturers and Annual
U.S.
1971.
in
was
it
by
generated
electricity
increases
private
costs
(purchased
purchased
regulatory
the
of
power)
power,
the
rules
and
procedures,
including
restrictions
on
the
use
purchases
of
economical
from buyer market power per
even
of
are
and
cogenerators
where
or
area
not
are
The
generating
prior
sector
specific
to
can
suppliers
primary
obtain
barriers
were
1978
to
power
single
a
wheeling
service
gain
not
service
access
to
independent
an
of
and
economics
unattractive
are
utility's
to
development
the
to
resulting
which
producers
within
sites
power
that
Monopsony power concerns
be small.
to
believe
I
purchased
of
supplies
likely
procedures.
bidding
independent
for
tied
independent
purchasers.
multiple
are
se
important
less
competitive
of
regulatory
disincentives and barriers.
equipment
^''Capacity,
risks,
timing of capacity additions,
except
*^Actually,
to
specify
from
for
FERC's
or
statute
any
and
rules
that
"standard
negotiation
bilateral
with
willing
all
is
very
contract
offer"
The
be
OFs,
small
requires
suppliers.
to
related
price
fuel
costs,
etc.
contracts
initial
general
a
transmission
availability,
to
which
on
based
rules
nothing
is
regulators
state
original
preferred
there
they
seem
to
utilities
purchase
anticipate
that
of
specification
administrative
to
force
must
the
in
generic contract terms and conditions that a utility must stand ready to buy under.
*^While this observation
may seem
obvious,
it
many
has eluded
'^One supplier signing a contract today may offer
to
regulators.
begin deliver in
another
1992,
in 1995, etc.
•* Lets
say
1995.
I
contract
for
the
begin
need
I
can
for
first
sign
100
100
delivery
in
100
a
MW
MW
MW
contract
term capacity in
of long
today
for
100
MW
for
of capacity to begin delivery in
1993
and
deliver
1995 or
in
I
MW
100
1993
more
and another
can »ign a contract
today and wait a couple of years to sign a »ccond contract
1995.
There
is
an
option
value
value must be traded off against the prices offered today.
associated
in
with
waiting.
to
This
"PURPA
**See generally, U.S. Department of Energy,
^^
Department
U.S.
Energy
11,
Federal
Re
Administrative
March
16.,
avoided
estimating
to
rates
were
that
commission
of
delivery,
not
enthusiasm
and
estimates
Implementation",
Chapter
only
initially
that
that
of
some
6.
initial
^°^U.S.
Department of Energy
production
On
other
hand,
energy
avoided
contracts
many
costs
note
12,
state
capacity
time
at
(Federal
negotiation
to
set
Department
generating
of
plenty
to
This
26.
approach taken by Massachusetts, for example.
analogy
Weitzman,
them
led
U.S.
the
and
regulators
state
costs.
pay
"PURPA
Implementation",
Regulatory Commission "Avoided Cost Rulemaking",
^°^The
made mistakes
regulators
Energy Regulatory Commission, "Avoided Cost Rulemaking," page
was the
RM88-6-000,
No.
avoided
already
capacity
Docket
.
Table
Rulemaking
Proposed
of
just
of
utilities
term
longer
leaving
was
there
that
Costs
power
small
reasonable
recognized
mandated
around,
The
above
far
Avoided
Full
cogeneration
"PURPA
Energy,
of
and
5.24-5.25
pp.
Notice
1988a,
The problem was
24.
costs.
promote
legislators
of
note
Implementation",
Commission.
Regulatory
E)etermination
11,
p.
"PURPA
Energy,
of
Implentation".
the
to
M.L.,
"Prices
price
Vs.
635-642, Federal Energy
p. 11, note 24.
quantities
vs.
pp.
Quantities,"
Review
how
FERC
should
literature
Economic
of
be
Studies
.
obvious.
Vol.
41,
October, 1974, pp. 477-491.
^°'This
appears
to
between
utilities
and
large
entitle
210 of
**^It
highly
in
QFs
be
probably
the
Stats
&
retains
offer
contracts.
anticipated
The
Regulations
1980
contracts
do
rules
Implementing
not
Section
Regs 30,128 and 30,868.
to
"self-scoring"
utility
originally
QFs would be consummated.
standard
makes sense
structured
which
larger
to
PURPA, FERC
precisely
think
bidding
of
there
system
considerable
being
a
continuum
and a competitive
flexibility
to
evaluate
between
a
negotiation
individual
very
system
contracts
and various combinations of contracts and
Power
*°^Houston
Lighting
and
competitive
bidding
system
was uncertain whether of not
and
quantities
negotiate
the
Maine Power, faced with
Central
first
then
competitive
"PURPA
competing
with
could
country.
U.S.
to
set
suppliers.
implement the
Department
of
Energy
options
bid
against
Implentation," pp. 5.44-5.54.
^^There
growing
a
also
is
new supply
between
a
standard
but allowed them
problem, was permitted to
the
in
PURPA,
they
deals
similar
a
using
from
resulting
supplies
under
legal
best
system
bidding
excess
propose
to
utility
first
approve the bidding system, in part because
not
was
it
the
with
The Texas Commission did
offers.
it
was
deal
to
internal production.
This
sources.
trend
demand,
supply,
trend
allow
to
is
conservation
and
unfortunate
consumer
and
reflects
producer
to
profound
a
confusion
Joskow,
behavior.
Paul
L.
Testimony Before the Subcommittee on Energy and Power, Committee on Energy and
Commerce,
"The
House
U.S.
Role
Representatives,
of
Programs
Conservation
of
Memorandum from Commissioner
Least
*°^"At
Electric
in
3
Utility
Week
Independent Power
*°*Klein,
B.,
Appropriable
Economics
.
November
.
and
the
"Contract
Review
.
.
Duration
Vol.
77,
1988,
12;
p.
Vol.
1.
and
No.
1,
No.
1.
Relationship
March,
1987,
1985,
Si>ecific
pp.
5,
"Vertical
Process,"
Journal
and
168-85;
Integration,
Law and
Long-Term
Contracts:
of
Law. Economics
Joskow,
33-80;
Investments,"
Investments
of
Journal
pp.
1988.
1988, p. 17.
1978,
Plants,"
4,
Solicitation,"
Tripled
Units
.
Integration
Spring,
Power
Va.
Week December
A.,
Generating
Electric
March
Charles,
Commissioners.
in
"Utility
Contracting
"Vertical
P.L.,
FERC
Win
Stalon,
NOPR,"
Bidding
Units
Alchian,
Competitive
Joskow,
October;
Organization
28,
and
R.
The Case of Coal Burning
and
Power
in Past Year," Electric Utility
Crawford,
Rents
The
in
and
1988,
31,
Charles Stalon to other
Independent
Utility
March
American
Williamson,
O.
E.,
P.L.,
Economic
"Credible
Commitments: Using Hostages
Support Exchange," American Economic Review
to
Vol
.
73, September, 1983, pp. 519-540.
^''^See
Table 9 which
I
*^°Joskow,
"Vertical
Adjustment
in
^^^As
5£
from
purchase
third
and
Contracts,"
Joskow,
"Price
Contracts."
earlier,
significant
a
is
Term
Long
and
Integration
Long Term
indicated
I
will discuss presently.
think
I
that
problem
efficiency
when
parties
unlikely
is
it
reality
in
party
third
monopsony
that
are
utilities
if
supplies
more
are
power
qsI
obligated
economical
to
than
internal production.
^^^National Electric Reliability Council, 1988 SupdIv and E>emand
Department
"'Massachusetts
of
Public
Appendix D.
.
84-276-B
D.P.U.
Utilities,
(October,
1986).
^^^There
prices
comparable
in
Adjustment
^^^Note
base
term
long
the
is
case
contract
the
in
contracts
coal
in
than
prices
found
Joskow,
work;
previous
I
for
"Price
Contracts",
cases
several
in
variance
the
contract
capacity
where projects anticipate
selling
than
the
project
two or more
utilities.
less
is
to
contracts are not reported because they were not executed in 1987,
^i«Edison
.
less
Long-Term Coal
This
The other
^^^For
In
that
capacity.
Energv
significantly
is
Electric
and
Capacity
Institute,
Generation
of
Non-Utilitv
of
Sources
1988. Washington, D.C., July, p. 32.
example,
price
one
of
the
plus
escalation
This
escalation
the
CPI.
the
escalation
provision
in
has
a
long
provision
that
projects
pricing
provision
the
in
power
the
supply
coal
term
escalates
supply
contract.
contract
coal
base
the
contract
The
gas
is
has
that
price
mirrored
fired
a
with
by
facilities
with
CPl
mechanisms are generally supported with
adjustment
term
long
gas
supply
contracts with CPI adjustment provisions.
^^*Joskow,
Economics
"Price
P.L.,
.
Long Term
Vol.
Adjustment
April
21,
Long Term
in
1988,
pp.
Contracts: Further Evidence
Joskow,
;
Adjustment
"Price
P.L.,
From Coal Markets," mimeo,
Law and
of
Journal
Contracts,"
in
1988.
***Joskow and Schmalensee, Markets For Power pp. 109-127.
,
^'"Massachusetts
Company,
Electric
Experiment 1988 Report," Westborough,
Findings,"
and
Barker
^''Temple,
December
MA,
Survey:
Facilities
Energy
pp.
of
11, 1988, p. 73.
.
Producers",
Results
1987.
"'"Edison Small Power Plans Dim," The Boston Globe December
^"Federal
Negotiation-Bidding
March, 1988.
"Qualifying
Sloane,
Energy
"Alternative
Commission,
Regulatory
18-21,
U.S.
Independent
"Regulating
Department of Energy, Energy Security
,
Power
pp 154-160 and
the references they cite.
"*"FERC OKAYS Ocean
Electric
Week
Utility
61,140 (1987) and 44
*'^"PG&E,
Bechtel
Report January
.
^'^Federal
1,
January
FERC
Form
Plant
19,
in
1987,
R.L
Where Investors
page
1;
Ocean
Will
State
Bear Full
Power
38
Risk,"
FERC
61,261 (1988).
Joint
Venture
For
Independent
Projects,"
Coeeneration
Governing
Independent
1988, page 12.
Energy
Power Producers,"
.
State
Regulatory
p. 6.
Commission,
"Regulations
^'^
PURPA
has
Although
distribution
exclusive
geographical
generation
what
accounting
its
supplemental
supplier
where
food
chemicals,
increasingly
accounting
cogeneration
is
above
affected
the
Development and
1987,
Electric
Cogeneration
November
Retention,"
Week
Utilitv
Deferral
.
Contracts
Cogeneration
Electric Utilitv
*'' White,
and
and
January
5,
Projects
Week. December
W.S.
Technical
Federal
special
avoided
"New
NRRI
Rates
now
have
accounting
I>esigned
Quarterly
Bulletin
paper,
has
traditional
rates
become
of
cost
with
Vol.
service
the
Economic
No.
8,
or
quite
serving
Encourage
to
.
and
the
associated
cost
industries
incentive
called
average
the
self-generation
below
rates
of
and
from
In
(pulp
of
rates
deferral
the
backup
production
feasible
sometime
are
regardless
supplies.
threat
self-
April
2,
November
With
18,
"PG&E,
1988;
California
PUC,"
Ed
Socal
Electric
Utilitv
File
Week
.
18, 1988.
*'*Texas
1,
see,
the
etc.)
below
or
the
of
cost
non-discriminatory
of
supplying
reduce the costs of
to
excess
facto
227-239; "Florida Okays Second Cogeneration Deferral Agreement For Gulf
pp.
Power,"
is
helped
has
economically
These
example
For
Load
and
from
charge
can
utility
value
offer
rate
a
process.
de
to
customers
purchase
to
market
to
marginal
utilities
customers.
and
pursuant
"stand-alone"
provide
to
Cogeneration
rates.
discount
the
The
ratemaking
retail
keep
PURPA
be.
the
service
what
on
refining,
oil
service.
deferral
While
routine.
the
utilities
of
cost
to
technically
processing,
on
cannot
they
cogeneration
is
forced
retail
utilities
reflecting
cogeneration
provide
bound
happen
for
rate
effects
self-generation.
requiring
service
a
at
—
upper
costs
by
self-generation
indirect
franchises,
natural
a
is
utilities
themselves
for
electricity
more
had
also
G.S.
Historical
1989,
Energy
pp.
Said
to
Have
95.7%
Availability
Factor,"
12. 1988, p. 12.
Vassell,
Electricity
"U.S.
Background,"
Public
Supply
Utilities
At
A
Fortnightly
Crossroads— The
.
Vo.
123,
No.
9-14 and "U^. Electricity Supply At The Crtossroads— The
Regulatory
Commission
Proposals,"
Public
Utilities
Fortnightly
.
Vol. 123. No. 2. January 13. 1989, pp. 9-13.
^'^Where
tended
on
rely
to
and
generation
only
transmission
term
long
requirements
with
contracts
power
bulk
single
a
have
systems
distribution
integrated,
are
supplier.
^"Forced
AT&T
reorganization
of
that
realistic
a
is
it
constraints,
that
transactions
corporate
transfers
primarily
reflects
regulators,
rather
regulation,
it
there
subject
over
are
legislation
involving
complexities.
one
firm.
constraint
real
have
turf
Any
Structural
many complex
done
be
not
change
was
in
industry
this
feel
would
be
internal
constraint
and
federal
of
state
vs.
federal
also
only
one
AT&T;
an
ratemaking,
antitrust
most
is
federal
require
financial,
through
they
this
would
reorganization
other
state
quality
There
indeed.
with
could
It
the
in
general
deal
to
While
between
battle
Among
than
rather
jurisdiction.
state
think
which
costs
jurisdiction
differences
real
lOUs.
100
would
and
regulatory
very
a
to
any
than
is
FERC
to
not
because
generation
the
la
do
I
further.
it
restructuring
over
a
utilities.
However,
discuss
vertical
bureaucratic
a
not
jurisdiction
subject
electric
possibility.
a
will
oppose
regulatory
wholesale
and
possibility
lose
existing
principle,
in
is,
regulators
state
would
they
of
disintegration
vertical
and
settlement
likely
to
take
place on the margin.
^'^
Privatising
For Energy, London,
^^ Acton,
J.P.
Exchange
of
Exi>eriment
.
^'^Federal
Eilill£.
Presented
Electricity .
and
HMSO,
Parliament
S.M.,
First
Regulation.
Year
Results
Efficiency
From
Rand Corporation, Report R-3301-DOE,
Energy
by
of
the
Secretary
and
Comt>etition
State
February 1988.
Besen,
Electricity:
to
Regulatory
Commission,
Docket No. ER87-97-000, March
Order
12, 1987.
the
FERC
Santa Monica,
Accepting
Bulk
CA,
Power
in
the
Market
1985.
Exi>erimental
Rates
For
^'^"Participants
Claiming
Electric Utility
Week October
"6pace,
No.
1987,
2,
and
"^ Pacific
District ):
Gas
Frame,
TRG
Access Etebate Rationally."
and
.
The
Commission
California
Contract"
with
Pacific
completed
Diablo
to
competitive
this
30,
structured
self-scoring
provide
"resources."
planning
regulatory
are
1988.
This
process."
review.
additional
bidding
All
of
The
would
proposed
Commission
be
require
system
from
rules
Regulatory
of
Mass
DPU
utilities
to
be
of
integrated
subject
seem
to
would
that
types
all
to
proposed
a
extensive
me
to
Order
develop
be
used
be
supply
with
a
and
"all
86-36-F,
a
highly
to
solicit
conservation
complex
and
new
time
extremely
"least
cost
consuming
ill-advised.
an unfortunate example of the aggegation of a couple of good ideas with
some bad administrative procedures, with
^*°Report
would
would
system
"regulatory
power produced by
of
Association
framework;
bidding
supplies
this
National
1988.
12,
non-traditional
pricing
the
May
86-36-C,
a
into
plant.
regulatory
competitive
Irrigation
9, 1989, pp. 3-6.
proposal
TTiis
Transmission
(Modesto
(1988)
D.P.U.
Massachusetts
the
solicitation"
November
to
order,
8,
Washington, D.C., 1987.
61,010
governing
nuclear
the
Vol.
.
61,403 (1988)
entered
Electric
Canyon
NERA,
1,
Utilities,
recently
.
source
They
Public
Commissioners, Bulletin January
^''Subsequent
bids
of
&
Gas
Experiment,"
Journal
"Approaching
J,
FERC
44
.
FERC
Turlock Irrigation District 43
Department
Utility
Working Paper No.
Law
Energy
Serve,"
to
and Pace,
R.
Company
Electric
^^Massachusetts
the
Obligation
the
265-302;
pp.
Bulk-Power
24, 1988, p. 14.
.
"Wheeling
J.,
WSPP
with
Satisfaction
the latter dominating.
To The Governor Findings and Recommendation of
Market Based Pricing of
Electricity.
November, 1987.
the
Task
Force
on
New
**'The
New
The
requires
Task
Jersey
Jersey
Commission
Unfortunately
capacity.
does
proposal
did
introduce
to
utilities
Force
enter
recently
competitive
a
the
not
chose
state
to
into
settlement
a
on
rely
to
be
system
bidding
agreement
new
for
highly
a
anywhere.
going
appear
that
generating
structured
self-
scoring bidding system.
**';
Laffont,
Journal
of
J.
and
J.
Economy
Political
"Using
Tirole,
J.
Vol.
.
94,
Cost
1986,
To
Observations
p.
Regulate
and
614;
Joskow
of
Proposed
Firms,"
Schmalensee,
"Incentive Regulation."
'*' Federal
Energy
Regulations
Governing
Energy
Federal
Commission,
Regulatory
Programs
Bidding
Notice
Docket
.
Commission,
Regulatory
Rulemaking
RM88-5-OO0, March
No.
Governing
Rules
Re
16,1988;
Administrative
Determination of Avoided Costs.
Energy
^^^Federal
Producers
The
September
Hearings
1,
on
the
FERC
Shook
1988,
pp.
29-32;
"NARUC
Electricity
Panel
NOPRs" and
"Future
FERC
Electricity
Strategy
Week
FERC
Electricity
.
1988,
p.
Initiative
Urge
Policy
Panel
FERC
Strategy
"NARUC
Congress,"
Not
to
Seeks
'Rush
to
Not
to
Power
Fortnightly
Utilities
Seeks
.
Congressional
Uncertain,"
Electric
Representative Provides Views on
NARUC
'Rush
Bulletin
.
Judgement'
to
September
On
19,
Electricity
26, 1988.
Congressional
Uncertain,"
Representative
NARUC
"NARUC
Congress,"
FERC
.
Electricity
To
Urge
Week September
Electricity
15;
To
Public
Electricity,"
15;
p.
Initiative
"Senators
Electric Utility
FERC
of
September 26, 1988,
15-18;
pp.
'**"NARUC
of
Governing Independent
Regulations
Year
Utility
NOPRs,"
Commission,
.
"^"1988:
1988,
Regulatory
Electric
Provides
Bulletin
.
Judgement'
September
On
Utility
Views
on
19,
Electricity
NOPRs" and
on
Hearings
Week
FERC
1988,
.
"Future
September
Electricity
pp.
NOPRs,"
15-18;
26,
Policy
"Senators
Elf ffic
Utility
Week September
26, 1988.
.
"^The
Public
federal
regulatory
generation
are
of
barrier
a
paper.
this
Energy
lines
envisioned
of
Statement
of
Securities
Exchange
and
(PUHCA)
1935
competitive
a
by FERC.
Catherine
and
of
of
problems
the
Commission,
Regulatory
attachments).
development
discussion
See
Act
the
to
market along the
complex and
Company
Holding
Utility
that
Cook
C.
Statement
(with
are
Before
the
***See
"Interutility
produced
^^''The
Federal
agency which
^^*This
does
have been
^^^Except
Power
Bulk
DOE/EIA-0418, October
Smythe
ways,
(with
Subcommittee
House
14, 1988.
also.
Energy
Transactions,"
Information
Administration,
1983.
power
defines
act
sells electrical
not
in other
Federal
attachments).
on Energy and Power of the Committee on Energy and Commerce, September
**^Electricity can be
PUHCA
beyond the scope
Marianne
of
Commission,
non-QF independent
The provisions of
creates
it
another
creates
exhaust
an
"electric
energy.
the
list
utility"
as
any
person
or
state
^
of possible
ownership and organization forms that
utilized.
perhaps
to
an
adjacent
establishment
without running wires across municipal rights of way.
if
the
sale
can
be
accomplished
TABLE
1
GROWTH IN WHOUESALE POWER TRANSACTIONS
4.
TRANSACTION
GROWTH
1973-85
1985-86
Short term interchange
60%
-21%
Longer term
56%
+ 2%
Canada
270%
-12%
wheeling
290%
-32%
Purchases From NUGs
318%
+AA%
•n'PE OF
Contracts
***************************************************************
Total sales to ultimate customers
32%
+2.0%
TABLE
2
AVERAGE NOMINAL CCMISTRUCTION COST OF NUCLEAR UNITS
1968-1987
Period Units Entered Service
Nominal Cost
1966-71
161
1972-73
217
$
Per Kv
197A-75
1976-78
623
1979-8A
1,3-3
1985
2.466
1986
2,765
1967 (est)
3,776
Source: Nuclear Power Plant Construction Activity
Energy Information Administration, 1987.
.
U.S. Department of Energy,
TARTF 3
ELECmiC UnLTIY FDWCIAL FERFOaWaf*^
1560-1987
YIELD CNNEW
yEm
POE
Um^PEBT
PIPJ-IKINGE
HacEywTK
RAno
%
EAFNDCS
AFIDC
iNnREsrr
OVEIV^ fK ARDC>
I960
10.20%
4.72%
5.48%
1.73
6.55%
5.11
1%1
1%2
10.30
5.58
2.15
5.77
5.D
10.70
4.72
4.40
6.30
2.06
5.07
5.22
1963
196A
10.80
4.40
6.40
2.22
3.61
5.23
11.10
4.55
6.55
2.22
4.07
5.20
1965
11.70
4.61
7.09
2.31
1966
12.10
5.53
6.57
1.97
5.18
4.97
1967
12.20
6.07
11.50
11.40
6.80
6.13
4.70
1.98
1968
7.98
3.42
1.70
1970
1971
1972
1973
1974
1975
10.80
8.79
2.01
10.80
7.72
3.08
1.59
1.48
11.00
10.50
7.50
3.50
1.34
7.91
2.59
1.10
10.40
9.59
0.81
1.15
10.30
9.97
0.33
1.06
1976
10.60
8.92
1.68
0.93
1977
11.00
8.43
2.57
0.61
1978
1979
10.70
11.00
10.70
9.30
1.40
10.85
13.46
0.15
-2.76
1981
1982
1983
1984
12.40
16.31
-3.91
0.64
0.74
0.65
0.68
4.56
5.40
7.80
10.19
13.87
21.48
26.33
30.27
31.92
35.91
34.23
31.53
29.40
37.37
46.82
56.01
52.85
1.95
U.20
14.93
-1.73
56.06
1.92
14.30
1.60
0.65
0.84
51.35
46.99
2.57
14.90
12.70
14.25
0.77
0.89
1985
1986
14.40
11.83
2.57
0.99
2.79
14.50
9.61
4.89
1.23
1987
12.70
9.75
2.95
1.18
42.70
32.33
30.39
1969
1980
*^kxxJy's 24 Utility Average
Moody's Public Utility Marual (Bite Sheets)
2.02
4.49
4.06
3.50
2.69
2.53
2.58
2.41
2.16
2.20
2.41
2.54
2.53
2.09
1.89
2.67
3.32
3.08
TABLE
A
NON -T7TILITY GENERATION (NUG)
1966-1986
NUG GENERATING
CAPACITY
YEAR
(MW^
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
18.973
18,933
19.123
19.257
19,237
19.297
18,768
19.377
19.351
19.177
19.113
19,245
19.391
17,436
17,323
17.142
16.938
16,765
17,371
22,920
25,321
NUG AS %
TOTAL U.S.
CAPACITY
7.11%
6.57
6.17
5.79
5.34
4.97
4.50
4.22
3.91
3.63
3.47
3.32
3.24
2.83
2.75
2.63
2.54
2.48
2.52
3.22
3.45
NUG
GENERATION
(mu)
105,094
102,935
106.586
110.575
108,162
103,239
104.508
102.529
101,572
85,362
87,084
87,575
78,967
71,375
67,945
64,446
61,076
57,678
71,520
94,925
112.008
Source: Edison Electric Institute (1988a, 1988b)
NUG SALES
TO UTILITIES
(KWHI
2,837
5,079
3.560
5,372
5,722
5,744
6,267
6,768
6,617
6,022
4.678
4,032
6,670
6,034
7,576
8,401
12,004
15,649
19,395
28,300
40,719
TABLE
5
NUG CAPACITY: ADDITIONS AND RETIREKENTS
1979-1986
(MW)
1979 NUG Capacity:
17.878
Cogeneration:
Small Power Production:
Other Industrial Plants:
2.
Apparent Retirements (1979-1986)
10.538
730
6.610
Cogeneration:
Small Power Production:
Other Industrial Plants:
3.
Net Pre-PURPA Capacity 1986:
2.18A
46
5.025
10.624
Cogeneration:
Small Power Production:
Other Industrial Plants:
A.
Post-PURPA Additions (1979-86)
Total NUG Capacity 1986
Cogeneration:
Small Power Production:
Other Industrial Plants:
(note #1)
8.354
684
1.585
14,697
Cogeneration:
Small Power Production:
Other Industrial Plants
5.
(note *1)
7.255
(note «1)
10,093
3,156
334
25,321
18,448
4,953
1,920
note #1: assxunes non- identified capacity is post-PURPA capacity
Source: Edison Electric Institute (1988b)
TABLE
6
SELECTED UTILITY COMPETITIVE BIDDING/NEGOTIATION PROGRAMS
Mw of Capacity
Requested
Bids Received
Utility
(KV)
Central Maine Power
(1987 solicitation)
200
1
Sierra Pacific (Nevada)
125
2 ,800
New England Power
200
4 ,729
1,750
14 ,000
30
180
Virginia Power
Eastern Edison (Mass.)
Boston Edison
(first)
(second)
(MW)
,444
200
400
2 ,053
(in progress )
Green Mountain Power (Vermont)
114
806
Jersey Central P&L
180
(in progress )
Delmarva P&L (Delaware)
200
(in progress )
Orange & Rockland Utilities
100
(in progress
Long Island Lighting
300
(in progress)
Source:
Trade Press Reports
)
TABLE
7
QF CONTRACTS SIGNED BY MASSACHUSETTS UTILITIES
1987
CONTRACT #
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Real Expected
Levelized Price
(cents/kWh-MECO Aseuiup)
Real Expected
Levelized Price
CcentsAWh-BECO
4.40
4.48
4.52
4.58
4.68
4.69
4.71
4.71
4.82
4.93
5.01
5.01
5.01
5.01
5.12
5.12
5.25
5.83
5.92
5.93
5.94
6.07
6.75
Source: Massachusetts Electric Company (1988)
6.92
4.43
5.75
6.44
5.93
4.75
5.84
4.57
5.06
5.66
5.21
5.21
5.21
5.21
5.17
5.17
5.17
5.88
5.97
5.73
5.94
6.14
6.87
Assumt)')
CAPACITY
(MV)
38.0
2.5
40.0
47.0
25.0
12.0
46.0
68.0
2.4
100.0
24.5
10.0
3.3
3.3
11.3
11.3
7.4
24.0
81.0
200.0
25.0
40.0
34.0
TABLE 8
1987 MASSACHUSETTS OF COWTRACT CHARACTERISTICS
Contract
Contract #
Capacity (MW)
Project
Capacity KU
Duration
Price
(Years)
Wheelina
Fuel
Escalators
1
38.0
38.0
25
yes
2
2.5
2.5
20
no
3
40.0
80.0
15
yes
gas
CPl, gas, pipeline
1,
47.0
47.0
20
yes
gas
fixed esc, fuel cost
5
25.0
156.0
20
yes
gas
CPI, gas, coal, oil, pipeline
6
12.0
12.0
20
no
46.0
46.0
20
8
68.0
300.0
20
yes
9
2.4
2.4
20
no
10
100.0
156.0
20
yes
gas
CPI, gas, coat, oil, pipeline
11
24.5
24.5
20
yes
gas
CP!
12
10.0
10.0
20
yes
gas
CPI
13
3.3
3,3
20
yes
gas
CPI
14
3.3
3.3
20
yes
gas
CPI
15
11.3
11.3
25
no
refuse
CPI
16
11.3
11.3
25
no
refuse
CPI
17
7.4
7.4
20
yes
refuse
fixed
\t
24.0
48.0
19
81.0
180.0
30
20
200.0
200.0
21
25.0
22
23
Source:
(abandoned)
gas
CNP, oil
waste
3X/year
landfil
CPI
gas
CPI, gas, coal, oil, pipeline
gas
fixed esc. ('92); 7.5X/year
landfill gas
CPI, oil
esc,
CPI
no
coal
CPI, CMP
yes
coal
CPI, GNP
n/a
no
coal
CPI, coal, rail
25.0
20
no
watte Mood
fUad aac,
40.0
40.0
25
no
refuse
CPI
34.0
34.0
n/a
no
coal
CNP
Plassachusetts Electric Ccapany (19B8>
avoided cost
FIGURE
1
CLASSICAL lOU
Wholesale Requirements
Customers
Retail Customers
A
Distribution
Transmission
Generation
Reliability
Short Term Economy
FIGURE
2
EVOLVING lOU
Retail
t
Reliability
Short Term Economy
Captive
Wholesale
lOU Contract Firm
A
A
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1
FIGURE 10
PRICES VS. QUANTITIES
S2
tn
in
oo
T3
O)
^2
D
i-i
O
^^ ^^
>
<:
UJ
d^^^^^^
P
1
>'
4-j
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r—
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^^3
•r-t
Q
Purchases from QFs
Figure
3
1951-1970, Edison Electric Institute, Historical Statistics of the Electric
Utility Industry To 1970 Washington, D.C. 197A; 1971-1986, Edison Electric
Institute, Statistical Yearbook Of the Electric Utility Industry 1986
Washington, D.C. 1987; 1987 (gas and coal). Statistical Yearbook Of the
Electric Utility Industry 1987 Washington, D.C. 1988; 1987 (oil) estimated.
.
.
.
Figure
A
The average U.S. reserve margin is computed as the difference between the
generating capability at the time of summer peak load and the non-coincident
summer peak load divided by the non-coincident summer peak load.
Edison
Electric Institute, 1987 Statistical Yearbook p. 14 (1967-1987) and Historical
Statistics of the Electric Utiluty Industry to 1970 p. 20.
,
.
ngure
^
Edison Electric Institute, 1987 Statistical Yearbook
Figure
,
p. 74,
Table 64.
6
Data in Figure
Figure
5
Adjusted by the GNP Deflator (1982 - 100).
7
Standard and Poor's Industry Studies (Electric Utilities), various years.
Figure
Table
Figure
8
3
9
Standard and Poor's Industry Studies (Electric Utilities), various years
Sources For Tabler and Figures
Table
1
Computed from U.S. Department of Energy, Financial Statistics of Selected
Electric Utilities 1986 DOE/EIA-0437 Washington, D.C., various years.
,
.
Table
2
Nuclear Power Plant Construction Activity
Information Administration, 1987, page 10.
.
Table
U.S. Department of Energy, Energy
3
Computed From Moody's Public Utility Manual (1988) (Blue Sheets) for Noddy's 24
Utility Average. Book values exclude deferred taxes.
Table 4
j
Source: Edison Electric Institute, Statistical Yearbook of the Electric Utility
Industry 1987 Washington, D.C. December 1988, p. 7 and p. 16.
;
.
T^b;e
5
Source: Edison Electric Institute, 1985 Capacity and Generation of Non-Utility
Sources Washington, D.C, July 1988, pp. 13-14
.
Table
6
Trade Press Reports
Table
7
Massachusetts Electric Company, Alternative Energy Nepotiation-Bldding
Experiment: 1988 Report Westborough, MA, March 1988, pages 41 and 43.
.
i
Table
8
Massachusetts Electric Company, Alternative Energy Negotiation-Bidding
Experiment: 1988 Report Westboroigh, MA, March 1988, pages 10 and 41-69,
.
6 6
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1
9
1991
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