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

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  • Burtraw, Dallas
  • Palmer, Karen L.
  • Krupnick, Alan J.

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 L. & Krupnick, Alan J., 1995. "'Second-Best' Adjustments to Externality Estimates in Electricity Planning with Competition," Discussion Papers 10753, Resources for the Future.
    • Handle: RePEc:ags:rffdps:10753
    DOI: 10.22004/ag.econ.10753
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    References listed on IDEAS

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    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.
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    10. 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.
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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. 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.
    3. 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.
    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. 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.
    6. Freeman III, A. Myrick, 1996. "Estimating the environmental costs of electricity: an overview and review of the issues," Resource and Energy Economics, Elsevier, vol. 18(4), pages 347-362, December.
    7. Tschirhart, John & Wen, Shiow-Ying, 1999. "Tradable Allowances in a Restructuring Electric Industry," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 195-214, September.
    8. 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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