Balancing incentives in a competitive marketplace
The historic system of rewarding utilities for service gives them no incentive to conduct business in the most efficient way. That system must change. Utilities should be rewarded for making sound resource procurement and management decisions. Regulators should rely on fundamental principles to help them craft a new regulatory bargain. Why should utilities be allowed to earn a kicker on purchased power Because traditional utility ratemaking allows utilities to earn a return only on invested capital, which creates a bias for building over buying, regardless of the relative merits of the options. The disincentive for investor-owned utilities to purchase wholesale power under traditional utility ratemaking practice creates the need for incentives or alternative mechanisms to encourage utilities to purchase power and reap the associated benefits. The traditional model worked reasonably well until purchasing power from non-utility-owned plants proved to be a viable, low-cost alternative to building new capacity. In the authors view, too much of the buy vs. build debate has focused on the risks of purchasing power under long-term contracts and quantifying the costs of those risks. Not enough attention has been paid to the relative risks (and costs) of alternatives (utility construction or demand-side management), or to the benefits of purchasing power and introducing competition to the generation side of the electric utility business.
- OSTI ID:
- 5288923
- 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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