Can Utility Commissions Improve on Environmental Regulations?

Using a second best framework, we determine the situations in which Public Utility Commissions (PUCs) can conceivably improve on existing environmental regulations. For resource choice decisions, PUCs can improve on welfare by adjusting the private costs associated with each option by the difference between the total external costs of that option and any pollution taxes or fees that would be paid were the resource developed. In regulating dispatch and pricing decisions, PUCs can increase welfare by taking into account any difference between a power plant's marginal private cost and its marginal social cost as constrained by the environmental regulations.