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168 U. Pa. L. Rev. 1181 (2019-2020)
Rate Regulation Redux

handle is hein.journals/pnlr168 and id is 1201 raw text is: ARTICLE RATE REGULATION REDUX JOSHUA C. MACEYt & JACKSON SALOVAARAtt In the 199os, the Federal Energy Regulatory Commission (FERC) stopped treating power generation as a regulated monopoly and supported the development of competitive electricity markets. Competition has encouraged innovation and reduced costs, but the payment system FERC and grid operators developed has struggled to provide low-cost electricity without leaving itself vulnerable to market power abuses. In a payment system based on marginal costs, generators necessary for grid reliability cannot recover their fixed costs unless they charge high prices when supply is scarce. However, because these generators have market power, permitting them to recover their fixed costs leaves energy markets vulnerable to market manipulation. To mitigate market power abuses, every grid operator in the United States has introduced offer caps that limit revenues available in energy markets. Offer caps can prevent some generators from recovering their fixed costs, leading to a missing money problem as critical suppliers are forced out of business and potential new entrants cannot cover their start-up costs. Today, growing penetration of renewables is exacerbating the missing money problem. Regulators and grid operators are responding by administratively pricing certain resources and supporting specfic units deemed too important to retire. These interventions lead to excess capacity and undermine competitive markets. As a result, current regulatory responses to the missing money problem recreate the inefficiencies that competitive markets were designed to solve, and they do so under questionable legal authority and at the expense of a clean energy grid. t Joshua C. Macey is an Assistant Professor at the University of Chicago School of Law. tt Jackson Salovaara works in the renewable energy industry. We would like to thank Matthew Christiansen, James Coleman, Danny Cullenward, Jeff Gordon, Monika Ehrman, Bill Eskridge, Miles Farmer, Dan Esty, Sharon Jacobs, Yael Lifshitz, Daniel Markovits, Jacob Mays, Jerry Mashaw, John Morley, Ari Peskoe, Eric Posner, Alan Schwartz, David Spence, Jed Stiglitz, Mark Thurber, Michael Wara, David Weisbach, Dave Weiskopf, Shelley Welton, Frank Wolak, and Katrina Wyman. We are also grateful to the University of Pennsylvania Law Review, and especially to James Kim, Caleb Flint, Megan Murphy, and Gabriella Ravida, who provided outstanding feedback and editorial support. (1181)

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