While electricity generation is critical to modern economic and modern life, it also generates substantial pollution, which falls disproportionately on minority and lower income groups. The world is in the middle of two major transitions to cleaner sources of electricity generation: first from coal to natural gas and from natural gas to renewable energy. These transitions are occurring in a highly regulated environment, raising the question of how regulation affects energy transitions and for the distribution of pollution (environmental justice). This project studies the effect of rate-of-return regulation on previous energy transitions and evaluates how changes in this regulatory structure may influence ongoing transitions. In addition, this project evaluates how environmental regulatory agencies incorporate environmental justice into their Clean Air Act Amendment enforcement decisions, and how alternative enforcement decisions impact community well-being. The results of this project will provide inputs into electricity regulation policies in order to hasten the transition to clean energy as well as improve environmental justice.
To evaluate the role of rate-of-return regulation in energy transitions, this project develops and structurally estimates a model where utilities invest in and retire generation capacity in the long run and make usage decisions in the short run. In this model, the regulator attempts to incentivize utilities to minimize costs while meeting electricity needs by offering a fair rate-of-return on generators that are deemed “used and useful.” Further, this project estimates how environmental justice enters regulators' preferences over enforcement. The model allows regulators to incorporate both communities’ and electricity generators’ welfare in enforcement decisions. This project provides a framework for evaluating new approaches to regulating electricity generators’ choices and the impact of these choices on local communities. The results of this project will provide inputs into electricity regulation policies in order to hasten the transition to clean energy as well as improve environmental justice.
