On the Economics of Cogeneration: Pricing and Efficiency in Government Owned Utilities

Cogeneration has been gaining increasing importance in the provision of electric power. When a utility purchases electricity produced by independent cogenerators and resells it to consumers, the question of whether or not a certain payment schedule of purchased power is "just and reasonable" becomes an immediate concern to each party concerned--the utility, cogenerators and possibly regulatory agencies.The U.S. regulatory agencies generally have endorsed avoided cost pricing since the passage of the Public Utility Regulatory Policies Act (PURPA) in 1978, the rule requiring that the utility pay avoided costs--the difference between total costs incurred by the utility before and after cogenerators' production. In Korea, on the other hand, a different rule has been implemented in pricing hydroelectric power purchased by the Korea Electric Power Corporation (KEPCO), Korea's only electric utility company from Korea Water Resources Corporation, a multi-reservoir dam corporation. The latter is currently paid based on actual costs incurred by its individual hydroelectric plants.