the likelihood of failing to recover costs associated with volatile inputs, such as fuel, emissions permits
or environmental construction work.
15Kentucky’s environmental surcharge law gives utilities the assurance that they will fully recover
the capital and operating costs associated with environmental compliance, and North Carolina’s
"Clean Smokestacks" bill allowed two utilities that serve North and South Carolina to freeze their
retail rates for five years in order to cover the costs of reducing NOx emissions.
16It is worth noting that firms will not be compensated for the opportunity cost of using the
permits they have been allocated to offset their emissions; they can only recover some portion
(1 — θυ) of their net permit purchase through higher rates.
17These are the New York ISO, the New England ISO and the "PJM" (Pennsylvania Jersey
Maryland) ISO.
18Downgrades outnumbered upgrades 65 to 20 in 2000; that ratio was up to 182 to 15 in 2002.
In 2003, 18 percent of firms were non-investment grade (Senate Committee on Energy and Natural
Resources).
19There has been at least one case of an independent power producer cancelling plans to install
SCR and choosing instead to rely on less capital intensice compliance options in order to improve
cash flows in the near term (2003-2005) (Platts Utility Environment Report 2002).
20The Electric Power Research Institute (EPRI) is an organization that was created and is funded
by public and private electric utilities to conduct electricity related R&D.
21Anecdotal evidence suggests that this software has been used not only by plant managers,
but also by regulators to evaluate proposed compliance costs for the utilities they regulate(Himes,
Musatti, Srivastra).
22Units in these two different groups were equipped with very similar NOx controls when the SIP
Call was promulgated. Over 80% of capacity in both types of markets had some type of low NOx
burners. Over 5% of capacity in restructured markets and over 7% of capacity in regulated markets
had installed some type of combution modification or overfire air ports. Only 1% of capacity in
restructured markets had been retrofit with SCR as of 2000, no SCR retrofits had taken place in
regulated markets.
23For example, the :"LNC1", "LNC2" and "LNC3" options are only appropriate for tangentially
fired boilers.
24Another advantage of the RPL model is that it relaxes the assumption that the unobserved
component of Cni is iid; unobserved components of anticipated compliance costs are represented in
the model as a combination of the standard iid extreme value term and the random component of the
coefficients. This induces correlations in the unobserved components across compliance alternatives,
which in turn allows for flexible substitution patterns between compliance choices.
25Other specifications were also examined, but provided worse results than the specification pre-
sented here.
26Interaction terms were added sequentially to the model and individual nested LR tests were
carried out. In each case, test statistics indicated that each of the four interaction terms belong in
the model.
27It is common in the literature to assume that cost coefficients are lognormally distributed,
so as to ensure the a priori expected negative domain for the distribution (costs enter the model
as negative numbers). Hensher and Greene(2002) discuss some of the drawbacks of assuming a
lognormal distribution. Log-normal specifications for the variable compliance cost coefficients were
tested, but resulted in a failure to reach convergence.
28For example, the effect of an incremental change in capital costs on choice probabilities in a
restructured and a regulated electricity market environment are calculated as follows:
45