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Regulatory Policy Regarding Distributed Generation by Utilities: The Impact of Restructuring

Electricity industry restructuring is only now beginning to focus on the role of utilities in distributed generation (DG). This paper examines whether, as restructuring unfolds, regulators may permit investor-owned distribution companies to own DG, and if so, under what terms. Concomitantly, the paper explores how ownership of DG by distribution companies impacts electricity restructuring. The paper concludes that regulated utilities should readily obtain approval to install DG on utility sites as long as the utility remains vertically integrated. Approval is also possible for vertically integrated or restructured utilities to provide DG at customer sites if it is shareholder-funded and connected on the customer's side of the meter. However, distribution company ownership of DG at utility sites or on the utility's side of the meter conflicts with electricity industry restructuring. Regulatory approval under restructuring is therefore highly problematical. Should regulatory approval be granted, the need to mitigate vertical market power is likely to precipitate the disaggregation of the distribution company.

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Energy Specializations: Electricity – Distributed Generation; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes: L94: Electric Utilities, L95: Gas Utilities; Pipelines; Water Utilities, G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill, L51: Economics of Regulation, D11: Consumer Economics: Theory

Keywords: Electricity industry, regulation distributed generation, restructuring, electric utilities, congestion

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-NoSI-9

Published in Volume 18, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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