The Implication of Incorporating Environmental Costs in Utility Rate Setting

Mariam, Yohannes (2002): The Implication of Incorporating Environmental Costs in Utility Rate Setting.

Abstract

Electric and natural gas are the two major sources of energy for residents of Washington State. Several states have adopted a policy whereby utility companies decide on the choice of mixes of resources by incorporating cost effectiveness, conservation and externalities.

Externalities could include the direct and indirect environmental and human health cost of using resources such as electricity and gas that are not captured by market prices. Washington State possesses diverse resources that are susceptible to wastes and emissions originating from the consumption of energy. The impact of these wastes could be spatial, short-lived or cumulative. By most accounts the overall impact of pollution on ecosystems could be far-reaching and greater than the quantifiable and monetized impacts of environmental externalities. The need to account for environmental externality becomes even stronger in situations where inter-generational equity is used as a criterion for planning long term resource requirement.

Utility companies in Washington State are not required to explicitly incorporate or account for externality in the development and implementation of Integrated Resource Plan (IRP). IRPs are used by utility companies to facilitate the identification of the least-cost mixes of resources in the delivery of energy to their customers over a long planning horizon. In addition, there are no cases in which utility companies were ordered to incorporate costs of environmental externality in setting rates.

The present study is intended to show the implication of explicitly incorporating externality in rate setting on i) changes in the prices of energy or utility rates, and ii) its contribution toward reducing emissions of selected pollutants. The study will explore situations under which externality estimates from other studies could be utilized to develop energy policies. Furthermore, the study will discuss ways in which increases in costs of using energy as a result of accounting for externality may be shared or accounted.

• Item Type: MPRA Paper
• Language: English
• Keywords: Electricity; natural gas; energy; cost effectiveness; conservation; externalities; environmental and human health; Integrated Resource Plan (IRP); long planning horizon; utility rates; emissions; pollutants
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Adoption and Costs ; Distributional Effects ; Employment Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q48 - Government Policy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q53 - Air Pollution ; Water Pollution ; Noise ; Hazardous Waste ; Solid Waste ; Recycling; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q41 - Demand and Supply ; Prices; L - Industrial Organization > L5 - Regulation and Industrial Policy > L51 - Economics of Regulation; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q57 - Ecological Economics: Ecosystem Services ; Biodiversity Conservation ; Bioeconomics ; Industrial Ecology; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L94 - Electric Utilities; L - Industrial Organization > L5 - Regulation and Industrial Policy > L52 - Industrial Policy ; Sectoral Planning Methods; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L95 - Gas Utilities ; Pipelines ; Water Utilities; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth; L - Industrial Organization > L9 - Industry Studies: Transportation and Utilities > L98 - Government Policy; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q51 - Valuation of Environmental Effects; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q42 - Alternative Energy Sources

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