With looming mandates and aging infrastructure, utilities need regulatory support.
H. Edwin Overcast is a director in the ratemaking and financial planning services group at Black & Veatch.
How can you tell if your utility regulator has gone too far in imposing costly mandates or denying adequate recovery of legitimate costs? What are the proper bounds for protecting the interests of a privately owned enterprise alongside those of the public if the relationship has become too one-sided? How can you restore the right balance?
The ongoing interactions between utility interests, the regulators and the public are guided in the broadest sense by a combination of legislative mandates, commission rulemakings and legal precedents. Some analysts have developed a short-form set of principles that summarize the scope of regulation by articulating a “regulatory compact” of quid pro quo exchanges that underlie the regulatory process. The concept dates back to the beginnings of utility regulation. The government determined that utilities, as natural monopolies, needed to be regulated lest they exercise monopoly market power. To prevent monopoly abuse, while maintaining access to capital in a highly capital-intensive industry, utilities were insulated from most competitive risks—but had to accept lower rates of return on their investments.