Employing gain-sharing regulation to promote forward contracting in the electricity sector

We examine the reductions in electricity procurement costs that can be secured when gain-sharing regulation is employed to induce a regulated load serving entity (LSE) to undertake forward contracting despite associated political risk. We identify arguably plausible conditions under which a modest degree of gain sharing can induce an LSE to undertake forward contracting that substantially reduces the LSE's procurement costs, to the benefit of retail consumers.