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"Second-Best" Adjustments to Externality Estimates in Electricity Planning with Competition

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  • Burtraw, Dallas

    () (Resources for the Future)

  • Palmer, Karen

    () (Resources for the Future)

  • Krupnick, Alan

    () (Resources for the Future)

Abstract

A number of state public utility commissions are using "social costing" methods to consider externalities in electricity resource planning. The most comprehensive and formal method is the use of monetary place-holders in the financial evaluation of new investments and potentially in system dispatch to reflect quantitative estimates of externality values. This approach necessarily must take existing environmental and social regulation as given. Furthermore, regulated utilities face increasing competition from electricity generators outside their service territory who may not be affected by social costing. The lack of universal and uniform social costing places PUC actions soundly in the realm of "second-best policy" and they may have unintended consequences that should be anticipated by regulators. This paper addresses two prominent possibilities: the potential substitution of unregulated supplies of energy services in place of electricity generated by the regulated utility, and the effect social costing may have on the relationship between the regulated price and marginal cost. These issues are considered within a normative model of social welfare maximization, which is applied to three representative hypothetical utility case studies to calibrate a second-best optimal adder to correct for externalities in electricity planning.

Suggested Citation

  • Burtraw, Dallas & Palmer, Karen & Krupnick, Alan, 1995. ""Second-Best" Adjustments to Externality Estimates in Electricity Planning with Competition," Discussion Papers dp-96-04, Resources For the Future.
  • Handle: RePEc:rff:dpaper:dp-96-04
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    References listed on IDEAS

    as
    1. Karen Palmer & Alan Krupnick & Hadi Dowlatabadi & Stuart Siegel, 1995. "Social Costing of Electricity in Maryland: Effects on Pollution, Investment, and Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 1-26.
    2. Daniel E. Dodds & Jonathan A. Lesser, 1994. "Can Utility Commissions Improve on Environmental Regulations?," Land Economics, University of Wisconsin Press, vol. 70(1), pages 63-76.
    3. Oates, Wallace E. & Strassmann, Diana L., 1984. "Effluent fees and market structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 29-46, June.
    4. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    5. Jorgenson, Dale W & Slesnick, Daniel T & Stoker, Thomas M, 1988. "Two-Stage Budgeting and Exact Aggregation," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(3), pages 313-325, July.
    6. John Tschirhart, 1994. "On the Use of 'Adders' by Public Utility Commissions," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 121-128.
    7. Bernow, Stephen & Biewald, Bruce & Marron, Donald, 1991. "Full-cost dispatch: Incorporating environmental externalities in electric system operation," The Electricity Journal, Elsevier, vol. 4(2), pages 20-33, March.
    8. Jorgenson, Dale W. & Wilcoxen, Peter J., 1990. "Intertemporal general equilibrium modeling of U.S. environmental regulation," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 715-744.
    9. Burtraw Dallas & Harrington Winston & Krupnick Alan J. & Freeman III A. Myrick, 1995. "Optimal Adders for Environmental Damage by Public Utilities," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 1-19, November.
    10. Joskow, Paul L., 1992. "Weighing environmental externalities: Let's do it right!," The Electricity Journal, Elsevier, vol. 5(4), pages 53-67, May.
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    Cited by:

    1. Randall Lutter & Jason F. Shogren, 2002. "Tradable Permit Tariffs: How Local Air Pollution Affects Carbon Emissions Permit Trading," Land Economics, University of Wisconsin Press, vol. 78(2), pages 159-170.
    2. Donald N. Dewees, 2008. "Pollution and the Price of Power," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 81-100.
    3. Vennemo, Haakon & Halseth, Arve, 2001. "Environmental regulation of a power investment in an international market," Resource and Energy Economics, Elsevier, vol. 23(2), pages 157-173, April.
    4. Burtraw, Dallas & Krupnick, Alan J., 1996. "The second-best use of social cost estimates," Resource and Energy Economics, Elsevier, vol. 18(4), pages 467-489, December.
    5. Spencer Banzhaf, H. & Burtraw, Dallas & Palmer, Karen, 2004. "Efficient emission fees in the US electricity sector," Resource and Energy Economics, Elsevier, vol. 26(3), pages 317-341, September.
    6. Meredith Fowlie, 2008. "Incomplete Environmental Regulation, Imperfect Competition, and Emissions Leakage," NBER Working Papers 14421, National Bureau of Economic Research, Inc.

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