Consumer Self-Generation and Monopoly Limit-Pricing under Timing Uncertainty of Deregulation in the Electricity Market

Due to uncertainty in the timing of deregulation for electric power generation, large and potentially self-generating consumers should consider a lost option value as part of the cost of any investment they consider. This paper uses a simple two-period model to analyze the role played by the timing anticipation of deregulation in the decision making of potential self-generators (PSGs) and for limit-contract pricing of local utilities. We develop an effective limit-pricing rule and conclude that a higher-probability of early deregulation will lead utilities to retain more consumers and to set higher limit prices before deregulation. A possible early deregulation might not harm utilities; it could even benefit utilities in finite lifetime periods. Finally, a simulation is provided which supports our main results and shows that the effects on utilities' expected profits of uncertainty about the coming deregulation will depend on the distribution of consumer types. Copyright 1999 by Kluwer Academic Publishers