This article examines how rivalry between an electric utility and nonutility generators (NUGs) affects electricity prices, market structure and welfare. If a utility cannot break even financially when outputs are priced at marginal cost, then the Ramsey optimal price paid by a utility purchasing electricity from a NUG should be below avoided cost, in contrast to the requirements of PURPA. The analysis also compares FDC, Residual and Ramsey prices for a utility's electricity sales. It illustrates how FDC prices may force a utility to exit relatively competitive business markets, eliminating any benefits of economies of scope from serving both business and residential customers.
ASJC Scopus subject areas
- Economics and Econometrics