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Revenue Caps or Price Caps? Robust Competition Later Means Healthy Choices New

Fortnightly Magazine - May 1 1996

1. See, for example, Eric Hirst, "Regulatory Discintives and DSM," Public Utilities Fortnightly (July 1, 1994); 45-48.

2. See California Public Utilities Commission, Division of Strategic Planning, California's Electric Services Industry: Perspectives on the Past, Strategies for the Future (San Francisco, CA; California Public Utilities Commission, February 1993).

3. In this article, "revenue caps" denotes both revenue decoupling and net-lost-revenue adjustment mechanisms. These mechanisms all break the link between sales and revenues. Specifically, they allow utilities to increase prices when sales decline.

4. See John L. Landon, "Performance-Based Regulation," presentation before the Regulatory Matters Committee of the Public Utilities Commission of Ohio, Columbus, OH, January 8, 1996; and Robert J. Graniere and Anthony Cooley, Decoupling and Public Utility Regulation (Columbus, OH: The National Regulatory Research Institute, 1994), Chap. 2. Among the states are New York and, until recently, Maine and Washington.

5. In Eric Hirst, Eric Blank, and David Moskovitz, "Alternative Ways to Decouple Electric Utility Revenues from Sales," The Electricity Journal 7, no. 6 (July/August 1994):47, the authors stated:

[I]nstead of price-cap regulation, which would penalize a utility for running DSM programs, commissions could implement revenue-cap regulation. Such revenue-cap regulation, adjusted from year to year for inflation and productivity, would encourage utilities to be innovative and aggressive in their cost cutting, while ensuring that shareholders are rewarded for running cost-effective DSM programs.

6. See, for example, Wayne P. Olson and Kenneth W. Costello, "Electricity Matters: A New Incentives Approach for a Changing Electric Industry," The Electricity Journal 8, no. 1 (January/February 1995): 28-40.

7. The analysis of revenue caps presented here follows the analysis of rent control as a revenue constraint. In the real world, the ceiling on rents represents a constraint on the rents allowed for a housing unit (em i.e., the price of housing services times the quantity of housing services. See, for example, Mark Frankena, "Alternative Models of Rent Control," Urban Studies 12 (October 1975); 303-08; and Richard Arnott, "Time for Revisionism on Rent Control," The Journal of Economic Perspectives 9, no. 1 (Winter 1995): 99-120.

8. This may not always be true. A technological change could simultaneously increase sales and reduce total costs if it causes the cost curve to shift down far enough.

9. The cost-effectiveness test says that a utility should invest in energy conservation when it is less expensive than an "equivalent" amount of electricity delivered to consumers.

10. See, for example, Larry E. Ruff, "Equity vs. Efficiency: Getting DSM Pricing Right," The Electricity Journal 5, no. 9 (November 1992): 24-25. The market test would justify utility-funded subsidies for energy conservation up to the difference between the marginal cost and the existing price as a response to a pricing failure (i.e., prices lying below marginal cost).

11. See, for example, Douglas A. Houston, Demand-Side Management: Ratepayers Beware! (Houston, TX: Institute for Energy Research, May 1993).

12. See, for example, The Regulatory Assistance Project, "Performance-Based Regulation: A Policy Option for a Changing World," Issues Letter (September 1994):3.


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