Sub-Optimal Generation Portfolio Variance with Rate of Return Regulation
- 1 Professor of Economics and Business, Hendrix College, Conway, Arkansas, USA
Abstract
This paper demonstrates that continuation of traditional rate-of-return electric utility regulation of transmission and distribution assets will impede the ability of customers to optimize their generation portfolios. Under linear price regulation, with increasing (decreasing) returns to scale customers will choose a more (less) risky generation portfolio than they would with no transmission and distribution asset rate-of-return regulation. Similar problems arise under non-linear (two-part) pricing of transmission and distribution assets. When the per-unit price is set at marginal cost, with increasing (decreasing) marginal cost, customers will choose a more (less) risky generation portfolio than they would with no transmission and distribution asset regulation. With price caps the optimal generation portfolio is chosen.
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