Forget Theory--Five Common Sense Rules Govern the Regulation of Electric Utilities

Abstract

Since the early 20th century, prices for retail electricity have been set through a highly structured process termed ratemaking. This process involves utilities and numerous other participants with opposing interests providing conflicting evidence in support of their position to increase or decrease electric prices. Government regulators are tasked with sorting out the evidence and determining what the actual prices will be. Taking into consideration the breadth of the evidence and the broad parameters regulators operate within, it is not surprising that decisions are difficult to predict and the prices set are often disappointing to the utility. The paper's authors posit that rate decisions are not necessarily based on a strict legal and economic standard. Rather, they follow five common sense rules. The paper explains these rules against a backdrop of the last 40 years of ratemaking decisions including recent efforts by some states to move to market-based pricing.