Implementing Social Costing in the Electric Utility Industry 1

Abstract

Social costing refers to the regulatory practice of requiring electric utilities to incorporate external costs into utility decision making. This practice is being adopted by a growing number of state public utility commissions (PUCs). The effectiveness of this new regulatory approach in reducing the social costs of supplying electricity will depend on the range of utility decisions covered. We use a utility planning model and illustrative estimtes of environmental costs to analyze the implications of different social costing regimes for generation technology choice, social and private costs of electricity supply and electricity price. Due to large differences in private costs across technologies and fuel types, social costing regulation has little or no effect on the utility's investment decisions, dispatch of generators or output price for many of the external cost estimates considered. Applying social costing exclusively to new generating units could result in increased use of existing units and higher social cost electricity production.