While the model of rate of return regulation served the electric utility industry well for nearly a century (and persists in many areas of the United States and other countries), it began to show some problems beginning in the 1970s. The rate of return regulation model did not always promote the most efficient investment decisions by electric utilities, and in particular, made it very difficult for electric utilities to invest in energy conservation. Additionally, regulators themselves did not always have the best incentives or the best information to regulate utilities properly. The model of electricity industry restructuring that was adopted did not begin in the United States, but the U.S. has become one of the leading countries in electric sector reforms. These reforms involved opening up the generation sector to competition, adopting an open access model for electric transmission similar to how highways or natural gas pipelines are regulated, and breaking up vertically integrated utilities. Some jurisdictions have attempted to improve regulation rather than engage in large-scale market reforms. These improvements include price and revenue cap regulation, sometimes called the "RPI - X" model, where price changes are pegged to targeted increases in utility productivity. While price and revenue cap regulation avoids some of the direct incentive problems of rate of return regulation, some of the inefficient incentives for utilities remain.
Reminder - Complete all of the Lesson 6 tasks!
You have reached the end of Lesson 6! Double-check the to-do list on the Lesson 6 Introduction page to make sure you have completed all of the activities listed there before you begin Lesson 7.