Research Update

Fall 2010

Greetings! We bring you research news from the Public Utility Research Center (PURC) at the University of Florida. Our electronic newsletter is designed to keep utility regulators, policymakers, and infrastructure managers informed of our research activities. We invite you to join our mailing list and receive our bulletins by email.

Implications of Carbon Cap-and-Trade for Electricity Rate Design

The production of carbon dioxide is a by-product of many production processes, including the generation of electricity through the combustion of fossil fuels. Some people argue there are additional costs, called 'externalities' by economists, associated with the combustion of fossil fuels not reflected in the current prices for those fuels.

They also argue that the production of carbon dioxide is causing changes in the planet's climate that will one day prove harmful, and the costs associated with adapting to these changes should be borne by the consumers of today. Although most governments have not adopted a price for CO2 emissions, there is a growing interest in including carbon externalities in electricity prices.

This paper examines how pricing CO2 externalities could affect utility costs and prices. Depending on the design of the program, how allowances are allocated or auctioned, what happens to the auction revenue, the total allowances available each year, and what actions are taken to reduce emissions, utility total revenue requirements will be affected. But the price of allowances will also affect the structure of the utility's costs, which has implications for rate design and load management programs. Read the paper, "Implications of Carbon Cap-and-Trade for Electricity Rate Design".

Oust the Louse:
Do Political Pressures Discipline Regulators?

The desire to remain in office is one possible determinant of regulatory decisions by public utility commissioners, but there are others. This paper examines the desire to remain in office as a determinant of regulatory decisions and of commissioners leaving their agencies.

Using data from US states, this empirical study finds that increases in electricity prices lead to ousting, that ousting is less common when it difficult to remove a commissioner, and that commissioner exit is not due mainly to the revolving door, contrary to some stated beliefs. Read the paper, "Oust the Louse: Do Political Pressures Discipline Regulators?".

Nuclear Power Expansion: Thinking About Uncertainty

Nuclear power is one way to reduce carbon dioxide emissions, likely to be mandated by an (as yet) undefined national climate change policy.

Investment costs in nuclear power are greater than any other conventional generating technology. The costs are irreversible and involve uncertainties during the project's development, construction, and commercial operation. This article extends a real-option value model to explain the uncertainties facing prospective nuclear plant developers and applies that model to describe mitigation strategies available for the development, construction, and operation of new nuclear plants. Read the paper, "Nuclear Power Expansion: Thinking About Uncertainty".

Storm Hardening Activities:
The Cost-Benefit Analysis of Underground Electric Distribution Lines

In 2008, wind storm events in the United States caused nearly $5.5 billion in property damages and more than 27 million customers to lose electrical power. In addition to losses from property damage, customers tend to suffer ancillary losses with interruptions in their electrical service.

Furthermore, these losses tend to grow exponentially as the outage persists. Following the storm seasons of 2004 and 2005, regulators and utilities in Florida embarked on an initiative led by PURC to study the effects of storm damage mitigation strategies. One outcome of this initiative is a computer model that can be used to quantify the benefits of storm hardening activities. The model is capable of simulating hurricanes and assessing how the distribution of storm damages to a project area changes with the application of storm hardening strategies. Read the paper, "Storm Hardening Activities: The Cost-Benefit Analysis of Underground Electric Distribution Lines".

Broadband and Contributions to Economic Growth:
Lessons from the U.S. Experience

The importance of innovation for a nation's economic well-being is fairly well understood. Even the connection between broadband deployment and economic prosperity in the United States has garnered public attention due to stimulus plan funding authorized in February 2009 for broadband planning and deployment initiatives.

To what extent does the adoption of innovative broadband applications contribute to economic growth? This article analyzes the connection between information and communications technologies and economic growth, as well as the connection between broadband and economic growth. There appears to be a positive economic impact from expanded broadband deployment and adoption. However, various research challenges, including methodological problems and access to sufficiently granular data, have prevented the authors from drawing more definitive conclusions from the U.S. broadband experience. Another finding is the time lag for businesses to effectively exploit innovative broadband applications. Read the paper, "Broadband and Contributions to Economic Growth: Lessons from the U.S. Experience".

Risks, Contracts and Private Sector Participation in Infrastructure

How is risk reflected in infrastructure regulatory contracts? Partnerships between public and private sectors in capital-intensive network services require risks to be assigned to the contractual party better able to mitigate or bear them.

After identifying risks that must be addressed in infrastructure contracts, their classification, allocation, and impact are presented along with the measures to minimize risks. The authors analyze two contracts in the water sector in Portugal. One arrangement corresponds to a public- private partnership (PPP) of purely contractual type (concession arrangement) and the other to an institutionalized PPP (mixed company). The risk is a key issue in contracts with the private sector: an appropriate allocation of risks is a necessary condition for successful contracts. Read the paper, "Risks, Contracts and Private Sector Participation in Infrastructure".

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