ABSTRACT
Electricity regulation began in the 1930s, largely on the basis that its production exemplified a natural monopoly. Public utility regulation sets price in a quasi-judicial process. The electric utility periodically comes before the commission to determine allowed profit, and which costs can be included in the rate base. This chapter presents a brief economic history of electricity and its regulation, followed by a section that provides an overview of the electric utility. It then develops the traditional approach to regulating electricity, followed by a section on alternatives that stop short of restructuring or deregulation. In the United States, the natural monopoly character of electric utilities led to the establishment of state public utilities commissions. There are additional proposals to improve economic efficiency, including payments for demand reduction and energy efficiency, decoupling revenues from sales, and incentive regulation. The utilities need to determine customer baselines accurately or risk compensating customers for illusory load reductions and falling short on revenue projections.
