Incentive Regulation, New Business Models, and the Transformation of the Electric Power Industry

The electric utility sector is in the midst of paradigmatic change. Market forces include decreased load growth, technological advances in distributed energy resources, pressures for decarbonization, and demands for increased efficiency and new utility services. Meanwhile, as the utility monopoly is undermined and profits slow, financial analysts signal increasing risk to potential utility investors. Suggestions for transforming the existing regulatory structure abound. At the broadest level, such proposals reflect an established divide between energy policy, which traditionally focuses on economics and markets, and environmental law, which is based in the protection of natural resources and ecosystems. To marry the two camps and reach the desired end goals of both industry and environmental advocates, an integrated approach—merging economic, regulatory, and environmental perspectives—must be taken. A key aspect of the analysis must be the recognition that regulation creates incentives, and incentive-based regulation can and should be used to further goals for the new utility system. This Article: (1) identifies regulatory and economic incentives embedded in the current utility system; (2) assesses current market trends and new utility goals; and (3) analyzes the intersection of embedded regulatory incentives and key proposals for regulatory changes in light of the new goals. It finds that proposals for regulatory change often fail to account for existing regulatory incentives, and ignore opportunities to use regulatory incentives to modify and encourage desired utility behavior. It concludes with recommendations for ways to incorporate incentive-based regulation in proposals for new utility regulatory structures