May 2005
Belfer Center for Science and International Affairs, Harvard University
This Volume II provides background on the legal and regulatory framework for implementing the 3Party Covenant and addresses important implementation issues regarding: state PUC regulatory authority, procedures, and policies; application of the 3Party Covenant in states with more traditional utility regulatory systems and states with retail electric competition; and the interaction of state PUC and FERC jurisdiction. In particular, Section 7.0 (the first section of Volume II) begins with an overview of the traditional electric industry regulatory system and how it impacts the allocation of risk in the development of new electricity generating plants, such as new IGCC plants. This section provides a foundation for understanding how utility regulatory commissions' ratemaking and cost recovery procedures and policies affect the allocation of construction, operating, and market risk between investors and ratepayers. A critical aspect of the 3Party Covenant is that it re-allocates risk among the federal government, investors, and ratepayers in a manner that reduces capital costs (and thus the cost of electricity produced) and creates a risk tolerant investment structure, while assuring protection of the interests of ratepayers and the federal loan guarantor.
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