Utility Regulation and Risk Allocation: The Roles of Marginal Cost Pricing and Futures Markets

Simon GB Cowan and Simon Cowan
Authors registered in the RePEc Author Service: Simon Cowan

No 100, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: The paper assesses the welfare effects of different ways of allocating input price risk between a regulated utility, consumers and speculators in a futures market. A risk-averse utility setting a fixed retail price requires a price that exceeds expected marginal cost, unless an efficient futures market is available. The firm bears no risk when input price risk is transferred to consumers, but consumers may not like price risk. When a futures market is available to consumers marginal cost pricing is always preferable to a fixed retail price. The policy conclusion is that marginal cost pricing should be combined with the development of futures markets in which consumers can hedge.

Keywords: price risk; utility regulation; futures markets (search for similar items in EconPapers)
JEL-codes: D11 D42 D80 L51 (search for similar items in EconPapers)
Date: 2002-03-01
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Citations: View citations in EconPapers (2)

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Journal Article: Utility Regulation and Risk Allocation: The Roles of Marginal Cost Pricing and Futures Markets (2004)
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