1 March 11 Regulation and Restructuring - Announcements Thursday March13 Tuesday March18 IntroduceESG ESGQ&A Practicerd 0 Noclass\/SpringBreak April1

1 March 11 Regulation and Restructuring - Announcements...

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Announcements Mid semester survey on bCourses. ESG teams announced on Thursday Schedule for next weeks: Thursday March 13 Introduce ESG Tuesday March 18 ESG Q&A Practice rd 0 No class/ Spring Break April 1 Portfolio auction Rd 1
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Electricity industry regulation and restructuring March 2014
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Economic regulation of a natural monopoly In principle, regulators want to promote efficiency. On the one hand, we want to have a single firm in this industry in order to benefit from least cost production/exploit economies of scale. On the other hand, a monopolist will price above the efficient price leading to welfare loss from the good being underprovided.
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We have discussed price regulation in theory Linear pricing Non linear pricing Ramsey pricing Peak load pricing
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How are natural monopolies regulated in practice? Traditionally, regulated monopolies subject to “rate of return” (ROR) or “cost—of service” regulation. Under rate of return regulation, the firm is allowed to earn no more than a “fair” rate of return on all prudent investments. ROR regulation adjusts overall price levels according to the operator’s accounting costs and costs of capital.
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Cost of service regulation is currently used to set rates in many markets: Electricity markets Generation (in most states) Transmission and distribution (everywhere) Retail Services (in most states) Natural Gas markets Transmission and distribution (everywhere) Retail Services (in most states) Crude Oil markets Pipelines for crude and refined products (everywhere)
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Primary actors in this process: The producers. The regulatory agency or agencies. Any other interest groups with a stake in the regulatory process (e.g. rate payer advocates, environmental groups, low income groups).
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California Public Utilities Commission CPUC employs almost 1000 economists, engineers, administrators, lawyers, judges, etc. Regulates electric, natural gas, telecommunications, water, railroad, rail transit, and passenger transportation companies. The Commission serves the public interest by protecting consumers and ensuring the provision of safe, reliable utility service and infrastructure at reasonable rates, with a commitment to environmental enhancement and a healthy California economy.
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Role of the CPUC Decide on fair rate of return for regulated firms (ie a rate that allows a “fair” return on investment) Determine what goes into the rate base ( this determines the revenue requirement) Given this, determine prices and rate structure that will yield s – Inorder to set price structures, the PUC must forecast demandand stipulates prices. Overall objective: PUCs want to set rate of return at the minimum level that maintains the firm’s financial viability and allows the firm to amass enough funds to finance required future investment.
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Rate of return regulation The idea is to calculate the utility’s total costs that need to be
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