ABSTRACT
This chapter reviews several issues in designing appropriate prices for the purchase of qualifying facilities (QF) power under regulatory constraint. It reviews the Federal Energy Regulatory Commission (FERC) regulations. The chapter discusses economically optimal ways to ensure to the utility a sufficient rate of return and discusses some second-best price adjustments. Pricing utility purchases of QF power at avoided cost is analogous to marginal cost pricing. An approach that is frequently used in wholesale power pricing is to split the savings, in our case between the avoided cost and the QF's marginal cost of generation. Things would become somewhat more complicated once people allow for QF differences in reliability, voltage level, contract length, and other factors which affect cost. The FERC regulations enacted in 1980 are not etched in stone.
