EBF 483
Introduction to Electricity Markets

5.0 Introduction


5.0 Introduction

Several times already during this course we have alluded to the "deregulation" or "restructuring" of electric utilities, and we'll spend a lot of the second half of this course discussing how these new electricity markets work. But before we do that, we'll discuss how electric utilities have been regulated for the last century or so. The model of utility regulation that we'll discuss is still used in roughly half the states in the US (mostly in the southeast and on the western power grid) and in countries around the world. So it is still relevant, even in the era of fast-paced electricity reforms and the development of sophisticated commodity markets for electric power.

Moreover, many of the most exciting developments in the electric power sector today do not involve markets, but those portions of the electricity supply chain that are still heavily regulated. Have a quick look at this short article about the battle heating up between solar energy providers and electric utilities. This is one of the most important issues facing the electric power sector today, and one that you will certainly encounter if you spend any time working in the electricity industry within the next one to two decades. But it's not a market issue at all - it's a fight about electric utility regulation and who is allowed to connect with the distribution grid owned by an electric utility.

So, utility regulation is important even in the era of modern electricity markets and competition. To understand why there are fights between solar power providers and utilities, you need to understand the business model under which electric utilities have worked for nearly 100 years - a model that involves very stringent regulation of prices and investment decisions.

In this lesson, we'll use a paper on utility regulation written by Mark Jamison, posted on Canvas.

  • "Rate of Return Regulation" - this paper provides a broad overview of the primary method of regulating public utilities, including electric utilities.
    • You are responsible for reading this material. Not all of it will be repeated in this online content.

While it's not required for this course, if you want to learn more about public utility regulation, the classic reference books are:

  • Edward Kahn, Electric Utility Planning and Regulation, 1998, American Council for an Energy Efficient Economy
  • James Bonbright, Principles of Public Utility Rates, 1961, Columbia University Press

Learning Outcomes

By the end of this lesson, you should be able to:

  • Explain the "regulatory compact," under which electric utilities were shielded from competition in exchange for strict state regulation.
  • Show how a monopoly can actually minimize costs in the face of economies of scale.
  • Explain the fundamental equation of rate of return regulation.
  • Define the rate base and identify utility expenses that would and would not be included in the rate base.
  • Explain the types of charges in an electric utility tariff.

Lesson Roadmap

Lesson 5 Roadmap
To Read Online course material
To Do Homework Assignment 5


If you have questions, please feel free to post them to the Questions about EBF 483 discussion forum. While you are there, feel free to post your own responses if you, too, are able to help a classmate.