Evolving electric utility regulatory policy: Internalizing the social costs of production
- Atlantic Electric, Pleasantville, NJ (United States)
Current electric utility pricing methods understate the margin social costs of electricity. Electricity prices are set to cover the utility's average cost rather than the higher marginal social cost. This mispricing hides from consumers the true cost their consumption imposes on society and, thereby, encourages them to ignore efficient conservation opportunities. Additionally, the conservation market suffers from a number of imperfections such as barriers to the acquisition of information, high upfront capital costs and the lack of conservation equipment availability. The electricity and conservation multi-market equilibrium is not achieved. The result is that society overconsumes (excess demand) electricity, overinvests in electric generating plants and underinvests (excess supply) in conservation resources. The large, yet uncertain, level of foregone conservation investment offers new opportunities for regulator and electric utility managers to improve economic efficiency with regulatory and planning policies that appropriately encourage the cost-effective use of conservation resources. In the absence of the most efficient policy, marginal social cost pricing, integrated resource planning (IRP) is being adopted as a potential second-best regulatory policy and utility resource planning framework to improve energy efficiency. IRP uses mathematical optimization methods to search among many alternate resource portfolios of electricity-creating and -saving technologies. These methods identify the mix that best meets society's needs with the least social cost, where the social external costs and benefits of generating plant and conservation, respectively, are considered. Such a goal requires the choice of a resource portfolio that optimizes a complex objective function. As a result, the solution offers a resource action plan for electric utilities that may be Pareto-improving.
- OSTI ID:
- 6218342
- Journal Information:
- American Journal of Economics and Sociology; (United States), Vol. 52:2; ISSN 0002-9246
- Country of Publication:
- United States
- Language:
- English
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Related Subjects
POLICY AND ECONOMY
ELECTRIC UTILITIES
RATE STRUCTURE
ENERGY CONSERVATION
COST
ENERGY CONSUMPTION
RESOURCES
OPTIMIZATION
CAPITALIZED COST
ENERGY EFFICIENCY
INFORMATION NEEDS
MARGINAL-COST PRICING
EFFICIENCY
PRICES
PUBLIC UTILITIES
296000* - Energy Planning & Policy- Electric Power
290200 - Energy Planning & Policy- Economics & Sociology