Research Highlights We apply financial risk, transaction cost, innovation and social welfare considerations to sustainability transitions  We analyze optimal choice between price and quantity instruments for support of emerging technologies  The dynamic nature of risk implies changes in optimal instrument choice during sustainability transition process  Price instruments seem optimal at first, then quantity control could take over with flattening marginal costs  Solar PV in Germany as case, where auctions (a form of quantity control) succeeded feed-in tariffs (price instrument

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Public utility commissions (PUCs) are increasingly adopting, or considering the adoption of, integrated resource planning (IRP) for local gas distribution companies (LDCs). The Energy Policy Act of 1992 (EPAct) requires PUCs to consider IRP for gas LDCs. This study has two major objectives: (1) help PUCs develop appropriate regulatory approaches with regard to IRP for gas LDCs; and (2) help PUCs respond to the EPAct directive. IRP requires a regulated utility to give equal consideration to both supply side and demand-side management (DSM) options in planning a resource mix. IRP has been extensively used as a policy tool to regulate electric utilities; it is a relatively new regulatory approach for gas LDCs. The rapidly developing competition in the energy industry warrants a reexamination of underlying issues and policy goals of IRP. Some of these issues include the nexus between competition and the participatory approach germane to the IRP process, the traditional regulatory issues of cost minimization and ratepayer equity, and the effectiveness of PUC regulation to achieve IRP goals of energy efficiency and environmental protection. The study finds that it is appropriate for PUCs to pursue energy efficiency within the traditional regulatory framework of minimizing private costs of energy production and delivery. The study concludes that PUCs should play a limited role in addressing environmental externalities. The study finds that in promoting energy efficiency, PUCs should pursue policies that are incentive-based, procompetitive, and sensitive to rate impacts. The study evaluates a number of traditional ratemaking mechanisms, in addition to nontraditional mechanisms, on the basis of cost minimization, energy efficiency, competitiveness, and other criteria. The mechanisms evaluated include direct recovery of DSM expenses, lost revenue adjustments for DSM options, revenue decoupling mechanisms, sharing of DSM cost savings, performance-based rate of return for DSM, provision of DSM as a separate service, deregulation of DSM service, price caps, at.2 deregulation of the noncore gas iii market. The study concludes with general recommendations for regulatory approaches and ratemaking mechanisms that PUCs may wish to consider in advancing IRP objectives. iv

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