For the past several decades, utility regulation at the state level dealt with secure local markets and truly captive customers. A regulatory compact flourished that offered reasonable prices to customers, while guaranteeing the monopolist the opportunity to earn a fair rate of return on prudently incurred investments. Cost-based, rate-of-return regulation provided a means to this end.
Unlike the past, the future portends unknowns for ratepayers, incumbent monopolists, competitors, and regulatory agencies. To accommodate that future, we believe a properly designed, incentive-based mechanism will prove superior to traditional rate-of-return regulation because it will allow the incumbent utility to compete with new market entrants on an even plain, while protecting the captive ratepayer and not interfering with competition.
Technology and Regulation
Whether engendered from product innovation (as in telecommunications) or process innovation (such as cost savings in the electricity industry), technological change lies at the heart of emerging competition and is the principle reason why changes in regulation are beginning to occur.