Coase-Sandor Working Paper Series in Law and Economics
Document Type
Working Paper
Publication Date
2023
Abstract
Many electric utilities in the United States own rate regulated and non-rate regulated subsidiaries. The rate regulated subsidiaries enjoy legal monopolies and a right to a return on their capital investments but are only allowed to charge regulatorily authorized rates. The non-rate regulated subsidiaries participate in competitive markets and are generally free to earn whatever profits they can but are subject to the threat of displacement by other enterprises.
Many electric utilities in the United States own rate regulated and non-rate regulated subsidiaries. The rate regulated subsidiaries enjoy legal monopolies and a right to a return on their capital investments but are only allowed to charge regulatorily authorized rates. The non-rate regulated subsidiaries participate in competitive markets and are generally free to earn whatever profits they can but are subject to the threat of displacement by other enterprises.
This Essay describes some strategies vertically integrated electric utilities use to transfer value from rate regulated affiliates to non-rate regulated affiliates. First, regulated utilities directly subsidize non-regulated affiliates by entering into favorable contracts with affiliates that participate in competitive markets. These contractual value transfers include favorable purchase agreements such as long-term contracts to buy coal at above-market prices and cross-affiliate debt guarantees that allow non-rate regulated affiliates to borrow at a discount. Second, utilities receive regulatory authorization to pass costs incurred by their non-rate regulated affiliates onto captive ratepayers. Examples of regulatorily approved value transfers are fuel adjustment clauses that authorize recovery of fuel costs from captive ratepayers and self-insurance that forces ratepayers to bear wildfire risk and transmission outages (even when insurance requirements are supposed to protect them from those risks). Third, utilities make investment decisions in rate regulated markets that favor their non-rate regulated affiliates. For example, utilities may invest (or refuse to invest) in transmission capacity to protect the market power of their generation assets—not to reduce energy prices, improve grid reliability, or connect to low-carbon energy sources. Utility value transfers thus make the grid less efficient, less reliable, more difficult to supervise, and more resistant to policy instruments that should encourage decarbonization.
Recommended Citation
Aneil Kovvali & Joshua C. Macey, "Hidden Value Transfers in Public Utilities", Coase-Sandor Working Paper Series in Law and Economics, No. 986 (2023).
