OPTIMAL ADDERS FOR ENVIRONMENTAL-DAMAGE BY PUBLIC UTILITIES

''Social costing'' refers to the consideration of environmental damage s and other external costs and benefits in resource planning or dispat ch decisions by electric utilities. Typically, utility regulators must take existing relations promulgated by other levels of government as parametric, so social costing represents a second layer of regulatory review with regard to many issues. The consideration of external costs at the level of utility regulation will have efficiency implications that are not obvious. For example, the practice is particularly conten tious when it is believed that industry-emissions of a pollutant are ' 'overcontrolled,'' in that they are subject to an emission limitation more stringent than what would be considered economically efficient. W ithin a simple but fairly general normative model, this paper presents some simple analytics for the consideration of social costs in utilit y decision making, assuming the objective of the regulator is to maxim ize social welfare. The efficient policy depends on the institutional characteristics of preexisting regulation. The role of deviations from marginal cost pricing in electricity pricing and the possibility of c ustomer bypass of the utility grid are explicitly modeled. (C) 1995 Ac ademic Press, Inc.