Abstract:
In 1986, Pacific Gas and Electric (PG&E), a private utility company serving most of northern and central California, was facing the loss of many of its biggest and best customers. The threat came not from conservation, general economic depression, or competing utilities; rather, customers were beginning to self-generate, or operate their own, small-scale power plants. PG&E estimated that industrial and commercial customers, responsible for 28 percent of sales, would soon find it cheaper to generate power on-site than to pay PG&E rates. The situation perplexed PG&E's regulators, the California Public Utilities Commission (CPUC), which perceived that industrial and commercial rates could be lowered only at the expense of residential customers or the utility's financial health. Moreover, the region's surplus of generating capacity suggested that new power plants would only make a bad situation worse. Indeed, the CPUC was also struggling with an excess supply of third-party generation, which utilities were required to buy under standard contracts set forth by the CPUC.
Learning Objective:
The case is intended to illustrate issues concerning the regulation of a potential natural monopoly, with an emphasis on the understanding of marginal cost. While the case was designed to highlight the dilemmas of regulators, it can also be taught from the utility's perspective.
