Cross-Subsidies: Getting the Signals Right

Deck: 

Should regulators care about the inefficiencies?

Fortnightly Magazine - December 2004
This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.

With the first wave of legislative utility deregulation largely complete, the bulk of market restructuring is now happening in the much less public, but just as important, realm of utility rate-making proceedings. Inside these proceedings, utility commissioners address the basic economic and contractual framework for electric utility services.

By setting the absolute rate and the rate structure under which electric service is provided, these proceedings affect all future capital allocation in the electric sector on both sides of the meter. Where the first wave of deregulation focused on wholesale power markets, this second deregulation wave directly affects retail markets. It is therefore critical that regulators carefully consider the long-term impacts of the proposed rates on the broader retail market.

Within these proceedings, commissions strive to avoid cross-subsidization of one ratepayer by another. Economic theory teaches that optimal economic efficiency occurs when costs and benefits are aligned, and thus cross-subsidization is widely considered a symptom of economic inefficiency to be avoided in utility rate design.

This full article is only accessible by current license holders. Please login to view the full content.
Don't have a license yet? Click here to sign up for Public Utilities Fortnightly, and gain access to the entire Fortnightly article database online.