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The Implication of Incorporating Environmental Costs in Utility Rate Setting

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

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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.

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