CALIFORNIA STATE UNIVERSITY, HAYWARD

COLLEGE OF BUSINESS AND ECONOMICS

MANAGERIAL ECONOMICS

GUIDELINES FOR CASE ANALYSIS

Competitive Bypass of PG&E

I. MAIN ISSUES

1. The nature, costs and benefits of PURPA and cogeneration and bypass (define):

(i) Why and how does PURPA generate benefits and to whom?

(ii) Why has cogeneration turned out to be such a problem for PG&E?

(iii) What are the major pros and cons of cogeneration and bypass?

2. Cost Allocation and Shifting:

(i) How much and why might costs shift?

(ii) How does rate regulation work?

(iii) What are the existing pricing schemes for different classes of customers (use Ex. 3 to calculate)?

(iv) How will cogeneration shift the cost burden and to whom?

(v) What are the issues of equity/fairness in cost allocation due to shifting? Who will be affected and how (e.g. low versus high income customers, PG&E shareholders, management and workers, different types of customers, current and future bypassers, etc)?

(vi) How might price discrimination and block pricing, etc. be self-defeating?

3. Relative Efficiency of PG&E and Cogeneration:

(i) What is the relevant criterion (MC or rates charged or energy efficiency) for assessing the efficiency of PG&E and cogeneration?

(ii) What are PG&E's true marginal costs (use Ex. 3&4&9 and Appendix I) and how do these compare with cogenerator costs during peak and non-peak hors? Has PG&E been paying its cogenerators more than its avoided costs (see Appendix 2)?

4. Need for regulating PG&E at all:

(i) Is PG&E a natural monopoly if the marginal cost of cogeneration is less than the marginal cost of PG&E's generation?

(ii) Is AC>MC for PG&E the result of PG&E's definition and allocation of cost method?

(iii) What are the dynamic arguments for deregulation?

(iv) Do the generation and transmission operations of PG&E need to be treated differently on cost/economies of scale grounds?

II ALTERNATIVE (EVALUATE EACH)

1. Do nothing

2. Rescind/revoke PURPA

3. Regulate PG&E differently (how?)

4. Deregulate PG&E generation or transmission or both

Please use the data in the case to support your arguments on these issues and look at the questions at the end of the case.