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Business & Money

The venerated process may get a makeover.
Fortnightly Magazine - August 2003

will look, however, remains uncertain. Some proponents argue that utilities should actually earn a return on purchased power, to the degree it displaces aging units that would be retired in a truly competitive market.

"Utilities are rewarded for their asset base. They are incentivized to throw money at aging units when there are newer options out there that make more sense," Haydn says. "If we had a real market, we would start to see rational behavior where inefficient producers would either shape up or ship out. But utilities don't get a return on equity from a power purchase agreement."

Allowing utilities to earn a return on purchased power that replaces aging units could eliminate the incentive to continue using power from less efficient and dirtier plants. Furthermore, expanding the definition of economic dispatch could be part of a broader process of updating ratemaking procedures to bring them in step with today's market conditions, according to Michael Zimmer, international partner with Baker & McKenzie in Washington, D.C. An updated approach to ratemaking would consider not only costs and market conditions, but also fuel, environmental, and security issues.

"There are perverse incentives under the old regulatory paradigm," Zimmer says. "In some instances, utilities have not filed rate cases for three to 10 years. Their rates do not reflect market realities, and they have an incentive to stay out of the commission."

In any case, while issues involving ratemaking treatment and stranded assets might prove challenging, the simple logic of expanding economic dispatch processes is difficult to fault. Now, if the industry and its regulators can accept the notion of interim measures on the road to market reform, expanded economic dispatch seems like a bankable policy trend for the near term.

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