ABSTRACT

What is the nature of the relationship between state regulators and regulated electric utilities? This question is at the center of ongoing debates over utility deregulation. Some (for example, Sidak & Spulber, 1997, Ch. 4) argue that the regulatory relationship constitutes a contract. Others such as Michaels (1995, p. 21) claim that the “regulatory contract” is a myth of recent vintage. Both sides agree, however, that the issue is vital. If there is a regulatory contract between states and utilities, then deregulation would, if it substantially altered the terms of the contract, constitute a breach. If there is no regulatory contract, then the government can alter the regulatory system however it wishes (consistent with constitutional due process and property-rights protections) without regard for the costs those changes impose on electric utilities.1