Economic efficiency, IRPs and long term contracts

There is no market failure that warrants utility regulation of the construction of new generating plants, the supply of energy efficiency or the purchase of fuel under contract. The natural monopoly problem applies to the distribution of electricity and gas, not to generation, energy conservation, or gas purchases. Utility regulation magnifies a market failure, which is the principal agent problem. Regulatory allowance of utilities signing long term fixed price contracts and undertaking conservation measures result in costs and risks being shifted to ratepayers that would not occur under competitive market conditions. Economic efficiency would be enhanced if cost of service regulation of electric and gas utilities were replaced by a competitive market process for the construction of new power plants, utility conservation programs and contracts to purchase fuel. Conservation measures could be supplied by energy service companies. Gas merchants could provide gas and energy conservation directly to ultimate customers, if they had access to LDC pipelines. With a competitive market established to sell gas and energy services, contracts and conservation measures would not require cost-of- service regulation.