ROE: The Gorilla Is Still at the Door
Incentive regulation is not a cure-all for the continuing controversy over return on equity.
Incentive regulation can provide benefits both to utility shareholders and customers by encouraging greater efficiency. But even if incentive regulation supplants traditional COS regulation, regulators and utilities still will need to confront the same basic ROE questions that have vexed both for many years. Because the base ROE under incentive regulation will be an integral part of the incentive structure itself, it ought not to be done as an afterthought. The approach described here is one way to address this important issue.
