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“Night of the Living Dead” or “Back to the Future”? Electric Utility Decoupling, Reviving Rate-of-Return Regulation, and Energy Efficiency

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  • Brennan, Timothy J.

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    (Resources for the Future)

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    Abstract

    The distribution grid for delivering electricity to the user has been paid for as part of the charge per kilowatt-hour that covers the cost of the energy itself. Conservation advocates have promoted the adoption of policies that “decouple” electric distribution company revenues or profits from how much electricity goes through the lines. Their motivation is that usage-based pricing leads utilities to encourage use and discourages conservation. Because decoupling divorces profits from conduct, it runs against the dominant finding in regulatory economics in the last twenty years -— that incentive-based regulation outperforms rate-of-return. Even if distribution costs are independent of use, some usage charges can be efficient. Price-cap regulation may distort utility incentives to inform consumers about energy efficiency -— getting more performance from less electricity. Utilities will subsidize efficiency investments, but only when prices are too low. Justifying policies to subsidize energy efficiency requires either prices that are too low or consumers who are ignorant.

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    Bibliographic Info

    Paper provided by Resources For the Future in its series Discussion Papers with number dp-08-27.

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    Date of creation: 15 Aug 2008
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    Handle: RePEc:rff:dpaper:dp-08-27

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    Keywords: decoupling; price caps; electricity; energy efficiency; conservation;

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    1. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-37, May.
    2. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
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    5. Brennan, Timothy J & Boyd, James, 1997. "Stranded Costs, Takings, and the Law and Economics of Implicit Constracts," Journal of Regulatory Economics, Springer, vol. 11(1), pages 41-54, January.
    6. anonymous, 1982. "Communication," Management Science, INFORMS, vol. 28(11), pages 1350-1351, November.
    7. Griffin, James M, 1982. "The Welfare Implications of Externalities and Price Elasticities for Telecommunications Pricing," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 59-66, February.
    8. anonymous, 1982. "Communications," Management Science, INFORMS, vol. 28(12), pages 1471-1475, December.
    9. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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