Economic implications of proposed changes in the regulation of cogeneration

Since PURPA, there has been a significant increase in cogeneration and other forms of non-utility power production. However, under regulations implementing PURPA, prices paid to cogenerators in some states exceeded the rates these firms pay to the utilities and some cogeneration contracts were based on oil prices far in excess of prevailing oil prices. FERC and state regulators now take a more market-oriented perspective, including competitive bidding. A simple model of cogeneration economics is proposed and a decision rule is derived. The implications of the decision rule are examined in terms of how potential cogenerators would respond to pricing procedures based on competitive bidding.