Private (Utility) Regulators

Abstract

The concept of the regulatory compact has long underpinned regulation of electric utilities: In exchange for a government-conferred monopoly over electricity services, the utility company submits itself to substantial government oversight, which — in theory at least — ought to prevent the emergence of monopolistic prices and other anticompetitive inefficiencies. Nevertheless, as this Article reveals, existing regulatory treatment of electric utilities fails to deliver on the public benefits of the regulatory compact. The Article supports this conclusion by highlighting previously-overlooked indicators of utility companies’ inefficiencies, and it attributes those inefficiencies to information asymmetries and regulatory capture.

Having demonstrated problems with the existing regulatory compact, this Article then turns to potential solutions. In so doing, the Article draws from a seemingly unlikely source: private equity. Though superficially distinct, the “business” of private equity actually shares important functional similarities with the task of public utility regulation, as private equity managers, like public utility regulators, must “oversee” the businesses without altogether taking over management of the company itself. Given these shared challenges, public utility regulators would do well to utilize tools that have yielded success within the private-equity sphere. Specifically, the Article points to two such tools — zero-based planning (“ZBP”) and complete transparency — that, it argues, will enable regulators, intervenors, and non-traditional market participants to innovate and ensure a more cost-effective energy transition.

While this would be a radical departure from current regulatory proceedings, it is necessary if the regulatory compact is to survive in a water- and carbon-constrained world. Utilities, through their actions in rate cases, are entrenching their positions, requiring both more time and money for any transition to the new energy system to occur. Adoption of these changes, fostering innovation and allowing a natural monopoly to exist only where explicitly necessary to meet grid and customer needs, may be enough to ensure the regulatory compact works in the public interest going forward.

Keywords: regulatory compact, utilities, private equity, efficiency, zero based planning, transparency

JEL Classification: D42, D82, G38, K23, K32, L12, L43, L59, L94, L97, L98, Q48