Negotiation Exercise Wrap Up

1
Negotiation ExerciseWrap Up

• Professor Doug Cerf
• Donald Bren Graduate School of Environmental
  Science and Management
• Environmental Risk Management (ESM 286)
• Winter 2008

2
Cost Minimization

• Assume rate payers have elastic demand for
  electricity
• Result market clearing price between 200 and
  250 per ton of SO2.
• Demand of permits equaled supply at 70,000.
• In phase1
• Utility 1 will sell 40,000, scrub and over
  comply
• Utility 2 will purchase 30,000
• Utility 3 will sell 30,000, switch coal and over
  comply
• Utility will purchase 40,000

3
Cost Minimization

• In phase 2 (50 of allowances available)
• Utility 1 will sell 15,000, scrub and over
  comply
• Utility 2 will purchase 25,000, partial scrub
• Utility 3 will purchase 10,000, switch coal
  Utility 4 will sell 20,000, scrub and over comply

4
Other assumptions

• Each utility purchases scrubbers to achieve max
  CO2 reduction (90,000 tons/utility/year)
• Expand its rate base for the long term as a
  result of the capital investment and pass through
  of costs to customer
• No demand for allowances (in the short term)
• Not interested in selling allowances because
  revenue is passed to consumers
• Worst financial (best environmental) scenario for
  ratepayers
• Assumes demand for electricity is inelastic

5
Southern Co. Acid Rain Case

• Least cost alternative
• Burn and Buy
• Scrub and sell
• Switch to low sulfur
• Cash Flow analysis
• Capital Budgeting (NPV) Analysis
• How much would we have to deposit now to cover
  each alternative
• Internal Rate of return is negative
• Assumptions
• Price for permits, scrubbers and coal
• Qualitative items that can not be included in the
  analysis