Non Utility Power, Alternative Regulatory Regimes and Stranded Investment

The electric industry is experiencing increasing competition in generation encouraged by non utility generators and regulatory agencies. An electric utility's problem of satisfying stochastic demand with either power purchased from non utility generators or with its own generators is examined. The utility is subject to either rate-of-return regulation, profit sharing or price caps. The level of profit at which sharing is triggered is shown to be endogenous to the utility's problem. The paper demonstates how the form of regulation affects purchases of non utility power and measures of stranded investment. Simulations highlight the tradeoff between allocative efficiency and recovery of stranded investment.