[open quotes]Incentives[close quotes] for purchased power: Compensation for risk or reward for inefficiency
Purchased power [open quotes]incentives,[close quotes] with rare exceptions, are government-granted consolation prizes which reward utility losers and penalize independent winners. Utility resistance to purchased power has prompted calls for incentives. Proponents of incentives cite two main rationales: (a) reduced rate base and (b) higher risk. As to rate base, they say that buying instead of building reduces the rate base on which earnings are determined. The seller therefore should pay an incentive [open quotes]to make the utility whole.[close quotes] As to risk, they say that purchased power obligations are the equivalent of debt, and debt means risk. The utility needs a higher equity return, for which the seller should pay. This article rejects both arguments. To resist actions which impede profit maximization is legitimate in a competitive market. But the utility-as-purchaser is the sole purchaser of new energy resources. It has both franchise responsibility and market power. Efficient acquisition of low-cost power is obligatory; it is not an option to be coaxed with incentives. As for risk, utilities' purchased power [open quotes]risk[close quotes] is largely attributable to competitive loss. In regulation as in a competitive market, the risk of competitive loss is not compensable.
- OSTI ID:
- 5288888
- Journal Information:
- Electricity Journal; (United States), Journal Name: Electricity Journal; (United States) Vol. 6:7; ISSN ELEJE4; ISSN 1040-6190
- Country of Publication:
- United States
- Language:
- English
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