Question

Imagine that you are a regulator for a utility that owns a small coal-fired generator. This generator emits sulfur dioxide (SO2) and oxides of nitrogen (NOx), both of which are regulated under the clean air act using a "cap and trade" system - in order to be in compliance with the clean air act, the utility could either reduce emissions or SO2 and NOx or purchase a "credit" for each unit of SO2 or NOx emitted. The credit effectively pays another power plant to reduce SO2 and NOx. An important feature of cap and trade systems is thus that the total amount of pollution is capped - so if my power plant does not reduce air emissions, then some other power plant has to. You can find more information on cap and trade programs at Cap and Trade 101 (Links to an external site.).

The utility could install pollution control devices, which would be included in the rate base. The utility could also purchase emissions permits instead of making a capital investment. If the utility asked that the cost of emissions permits be included in the rate base (and thus the utility would earn a regulated rate of return on the costs associated with purchasing emissions permits), would you agree to such a request? Be sure to explain your reasoning clearly in your answer. A hint is that you may want to draw on the discussions of prudent and "used and useful" investments from the Jamison reading.

Answer 1

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