A dynamic model for forecasting and policy making in the regulated electric utility industry

Abstract

A dynamic simulation model has been developed to assist in the areas of forecasting and policy making in the regulated electric utility industry.

Various scenarios are constructed by running the model under different assumptions and policies. In this way the behavior of the system is studied under different conditions and optimal policies are chosen.

The scenarios present effect of varying interest rates and fuel prices on the prices and profit of electrical energy, the effect of regulatory policy on the price, demand and profit for electrical energy, the effect of peak load pricing in reducing capital costs to the utility, the effect of volume pricing on the electrical energy price-demand-profit system, the effect of an automatic cost of service adjustment clause on the price, demand and profit of electrical energy and the effect of limited capital availability on the utility’s ability to satisfy peak load demand.

From the studies of the various scenarios, a combined policy of peak load pricing and stringent regulation seems attractive. This type of policy would reduce the capital costs to the utility allowing it to maintain profits, while at the same time the price of electrical energy is kept at a low level.

From the different scenarios it is evident that the financial future of the electric utility, even with the rapid rises of the prices of electrical energy, is bleak. Hence, it is essential to implement policies which would simultaneously improve the financial integrity of the utility and maintain a low level of prices for electrical energy,

This gloomy outlook for the electric utility could be brightened by technological innovations, lower interest rates and lower fuel prices.