Contracts and the institutional environment for electricity reform

Electricity Journal

Volumn 12, Issue 10, 1999, Pages 51-60

  Danielsen, Albert L ^a   Gupta, Nainish K ^c   Klein, Peter G ^b  

^a UNIVERSITY OF GEORGIA   (United States)

^b UNIVERSITY OF GEORGIA   (United States)

^c NONE

Author keywords

[No Author keywords available]

Indexed keywords

ELECTRICITY REFORM;

EID: 0033475245     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/S1040-6190(99)00097-4     Document Type: Article

References (43)

1. We refer here to explicit contractual arrangements between utilities and NUGs. For applications of the breach literature to the general "regulatory compact" between utilities, regulators, and customers, see James Boyd, The "regulatory compact" and implicit contracts: Should stranded costs be recoverable? 19(3) Energy J. 69-83 (1998), and J. Gregory Sidak and Daniel F. Spulber,Deregulatory Takings and the Regulatory Contract (Sambridge University Press, 1998).
2. We refer here to explicit contractual arrangements between utilities and NUGs. For applications of the breach literature to the general "regulatory compact" between utilities, regulators, and customers, see James Boyd, The "regulatory compact" and implicit contracts: Should stranded costs be recoverable? 19(3) Energy J. 69-83 (1998), and J. Gregory Sidak and Daniel F. Spulber, Deregulatory Takings and the Regulatory Contract (Sambridge University Press, 1998).
3. Lance E. Davis and Douglass C. North, Institutional Change and American Economic Growth (Cambridge University Press, 1971).
4. Jean-Michel Glachant and D. Finon, Why do the European union's electricity industries continue to differ? A new institutional analysis, in Institutions, Contracts and Organizations: Perspectives from New Institutional Economics (Claude Menard, ed., Aldershott, U.K., Edward Elgar, forthcoming).
5. For a similar analysis of telecommunications reform, see Brian Levy and Pablo T. Spiller, Eds., Regulations, Institutions and Commitment: Comparative Studies of Telecommunications (Cambridge University Press, 1996). For a more general treatment, see Mary M. Shirley, Ed., Bureaucrats in Business: The Economics and Politics of Government Ownership (Washington, DC, World Bank, 1995).
6. For a similar analysis of telecommunications reform, see Brian Levy and Pablo T. Spiller, Eds., Regulations, Institutions and Commitment: Comparative Studies of Telecommunications (Cambridge University Press,1996). For a more general treatment, see Mary M. Shirley, Ed., Bureaucrats in Business: The Economics and Politics of Government Ownership (Washington, DC, World Bank, 1995).
7. For a summary see Eirik G. Furubotn and Rudolf Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (Ann Arbor, Michigan, University of Michigan Press, 1997); and Peter G. Klein, New institutional economics, in Encyclopedia of Law and Economics (Boudewin Bouckeart and Gerrit De Geest, eds., Aldershott, U.K., Edward Elgar, forthcoming).
8. For a summary see Eirik G. Furubotn and Rudolf Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics (Ann Arbor, Michigan, University of Michigan Press, 1997); and Peter G. Klein, New institutional economics, in Encyclopedia of Law and Economics (Boudewin Bouckeart and Gerrit De Geest, eds., Aldershott, U.K., Edward Elgar, forthcoming).
9. The social result is what Hayek would call a "spontaneous order," the result of a decentralized, invisible-hand process. See F.A. Hayek, The results of human action but not of human design, in idem., Studies in Philosophy, Politics, and Economics (Chicago, University of Chicago Press, 1967); and F.A. Hayek, Law, legislation, and liberty, Vol. 1, Rules and Order (Chicago, University of Chicago Press, 1973).
10. The social result is what Hayek would call a "spontaneous order," the result of a decentralized, invisible-hand process. See F.A. Hayek, The results of human action but not of human design, in idem., Studies in Philosophy, Politics, and Economics (Chicago, University of Chicago Press, 1967); and F.A. Hayek, Law, legislation, and liberty, Vol. 1, Rules and Order (Chicago, University of Chicago Press, 1973).
11. Oliver E. Williamson, The Economic Institutions of Capitalism (New York, Free Press, 1985) and The Mechanisms of Governance (New York, Oxford University Press, 1996).
12. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
13. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
14. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
15. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
16. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
17. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
18. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
19. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
20. The literature focusing on contract law includes Karl N. Llewellyn, What price contract? An essay in perspective, 40 Yale L. Rev. 704-51 (1931); Ian R. Macneil, The many futures of contracts, 47 S. Cal. L. Rev. 691-816 (1974); Ian R. Macneil, Contracts: Adjustments of long-term economic relations under classical, neoclassical, and relational contract law, 72 Nw. U. L. Rev. 854-906 (1978); and John H. Langbein, Comparative civil procedure and the style of complex contracts, 35 Am. J. Comp. L. 381-94 (1987). The literature focusing on property law includes Armen A. Alchian, Some Economics of Property (Santa Monica, CA, Rand Corp.,1961); Harold Demsetz, Toward a theory of property rights, 57 American Economic Rev. 347-59 (1967); Eirik G. Furubotn and Svetozar Pejovich, eds., The Economics of Property Rights (Cambridge, Mass., Ballinger,1974); Louis De Alessi, The economics of property rights: A review of the evidence, in Research in Law and Economics(1980): 1-47; and Yoram Barzel, Economic Analysis of Property Rights (Cambridge University Press, 1989).
21. Marc Galanter, Justice in many rooms: Courts, private ordering, and indigenous law, 19 J. of Legal Pluralism 4 (1981). Several recent studies on decentralized law and its evolution are examples of this "private ordering" tradition, among them Bruce L. Benson, The Enterprise of Law: Justice Without the State. (San Francisco, Pacific Research Institute for Public Policy, 1990); Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes. (Cambridge, MA, Harvard University Press, 1991); and Robert D. Cooter, Structural adjudication and the new law merchant: A model of decentralized law, 14 Int'l Rev. L. & Econ. 215-31 (1994).
22. Marc Galanter, Justice in many rooms: Courts, private ordering, and indigenous law, 19 J. of Legal Pluralism 4 (1981). Several recent studies on decentralized law and its evolution are examples of this "private ordering" tradition, among them Bruce L. Benson, The Enterprise of Law: Justice Without the State. (San Francisco, Pacific Research Institute for Public Policy, 1990); Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes. (Cambridge, MA, Harvard University Press, 1991); and Robert D. Cooter, Structural adjudication and the new law merchant: A model of decentralized law, 14 Int'l Rev. L. & Econ. 215-31 (1994).
23. Marc Galanter, Justice in many rooms: Courts, private ordering, and indigenous law, 19 J. of Legal Pluralism 4 (1981). Several recent studies on decentralized law and its evolution are examples of this "private ordering" tradition, among them Bruce L. Benson, The Enterprise of Law: Justice Without the State. (San Francisco, Pacific Research Institute for Public Policy, 1990); Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes. (Cambridge, MA, Harvard University Press, 1991); and Robert D. Cooter, Structural adjudication and the new law merchant: A model of decentralized law, 14 Int'l Rev. L. & Econ. 215-31 (1994).
24. Marc Galanter, Justice in many rooms: Courts, private ordering, and indigenous law, 19 J. of Legal Pluralism 4 (1981). Several recent studies on decentralized law and its evolution are examples of this "private ordering" tradition, among them Bruce L. Benson, The Enterprise of Law: Justice Without the State. (San Francisco, Pacific Research Institute for Public Policy, 1990); Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes. (Cambridge, MA, Harvard University Press, 1991); and Robert D. Cooter, Structural adjudication and the new law merchant: A model of decentralized law, 14 Int'l Rev. L. & Econ. 215-31 (1994).
25. Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge University Press, 1990), at 36.
26. Carl Menger, Investigations into the Method of the Social Sciences with Special Reference to Economics (New York, New York University Press, 1985; originally published in 1883), at 146.
27. An example is the coordination game made famous by Schelling (1960). Two friends arrange to meet one day at 5:00 p.m. in New York City. As the time of the meeting approaches, however, neither can remember where the meeting was to take place. Furthermore, the friends cannot contact each other to verify the location of the meeting; each must guess, independently, a likely meeting place. What can they do? This game has multiple Nash equilibria: any outcome in which both friends choose the same location - say, the corner of 34th Street and 5th Avenue - is a Nash equilibrium to the game. According to Schelling, when faced with this kind of problem, agents rely on cultural information outside the structure of the game. Everyone simply knows, for example, that the logical place to meet in New York City is beneath the clock in the main terminal of Grand Central Station. This equilibrium is what Schelling called a "focal point." Over time, he argued, behavioral regularities develop so agents can solve these kinds of coordination problems. See Thomas C. Schelling, The Strategy of Conflict (Cambridge, MA, Harvard University Press, 1960).
28. Andrew Schotter, The Economic Theory of Social Institutions (Cambridge University Press, 1981), at 11.
29. Ellickson, supra note 9.
30. Robert D. Cooter, S. Marks, and R. Mnookin, Bargaining in the shadow of the law: A testable model of strategic behavior, 11 J. Legal Studies 225-51 (1982).
31. The traditional account of the medieval law merchant illustrates this phenomenon. During the commercial revolution merchants developed a system of private courts to resolve disputes among themselves. The rules of these courts became general merchant practice, enforced by the threat of ostracism. As the English legal system developed, judges began to hear commercial disputes once handled privately. In resolving these disputes, English common-law judges tended to enforce the merchant customs already in place. In this way the common law came to embody the principles that already existed, principles developed through private interaction among merchants. On the law merchant, see Leon E. Trakman, The Law Merchant: The Evolution of Commercial Law (Littleton, CO, Rothman & Co., 1983), and Bruce L.Benson, The spontaneous evolution of commercial law, 55 S. Econ. J. 644-61 (1989).
32. The traditional account of the medieval law merchant illustrates this phenomenon. During the commercial revolution merchants developed a system of private courts to resolve disputes among themselves. The rules of these courts became general merchant practice, enforced by the threat of ostracism. As the English legal system developed, judges began to hear commercial disputes once handled privately. In resolving these disputes, English common-law judges tended to enforce the merchant customs already in place. In this way the common law came to embody the principles that already existed, principles developed through private interaction among merchants. On the law merchant, see Leon E. Trakman, The Law Merchant: The Evolution of Commercial Law (Littleton, CO, Rothman & Co., 1983), and Bruce L.Benson, The spontaneous evolution of commercial law, 55 S. Econ. J. 644-61 (1989).
33. Ronald L. Solove, Alternative means to resolve corporate disputes: A survey, 91 Com. L. J. 133-40 (1986), and Cooter, supra note 9.
34. Ronald L. Solove, Alternative means to resolve corporate disputes: A survey, 91 Com. L. J. 133-40 (1986), and Cooter, supra note 9.
35. For general discussions of the economics of contracts and breach, see Robert D. Cooter and Thomas Ulen, Law and Economics (Reading, MA, Addison-Wesley, third ed., Forthcoming in 2000); Steven Shavell, Contracts, and Aaron S. Edlin, Breach Remedies, both in Peter Newman, ed., The New Palgrave Dictionary of Economics and the Law (London, Macmillan, 1998).
36. For general discussions of the economics of contracts and breach, see Robert D. Cooter and Thomas Ulen, Law and Economics (Reading, MA, Addison-Wesley, third ed., Forthcoming in 2000); Steven Shavell, Contracts, and Aaron S. Edlin, Breach Remedies, both in Peter Newman, ed., The New Palgrave Dictionary of Economics and the Law (London, Macmillan, 1998).
37. Shavell, supra note 18, at 11.
38. Joseph Pokalsky and John Robinson, PURPA and stranded costs, in The US Power Market: Restructuring and Risk Management (London, Risk Publications, 1997).
39. See, for example, Ferc decision EL-95-41, denying a petition by Metropolitan Edison and Pennsylvania Electric to restructure six NUG contracts.
40. Southern California Edison and Pacific Gas & Electric have the largest potentially stranded NUG contract exposure, and were No. 1 and 2 in the U.S. in 1997. SoCalEd's NUG total purchases cost $2.428 billion in 1997 for some 27,000 GWh at an average rate of $89/ MWh. SoCal Ed derived 62 percent of all power purchases from NUGs in 1997, helping to give it the highest overall wholesale power cost in the country at $76/MWh. PG&E derived 49 percent of its power purchases from NUGs in 1997 and paid $1.595 billion for 18,900 GWh, at an average rate of $84/MWh. Source: RDI Energy Insight.
41. A total of 135,110 GWh of power was purchased under the 150 highest-priced NUG contracts in 1997. Although down from 148,600 GWh purchased in 1996, the total rate per megawatt hour was 12 percent higher. This contributed to a $180 million increase in total electricity charges for NUG-produced power over 1996, making the total dollar expenditure $10 billion. The same $10 billion could have purchased some 300,000 GWh of electricity at an average price of $30/MWh.
42. Larry Kellerman, The management and minimization of stranded generation cost, in The US Power Market: RestructurIng and Risk Management (London, Risk Publications, 1997).
43. See the authors' mimeo, Breach of Contract in Electric Utilities: When Should Promises Be Broken? (University of Georgia Department of Economics, 1999) for a more complete exposition of these terms.