Should regulators care about the inefficiencies?
Sean Casten is president of TurboSteam Corp. and the policy chair of the Northeast Combined Heat and Power Initiative. Joshua Meyer is a manager at Encorp and the market development chair of the Northeast Combined Heat and Power Initiative.
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.