Rate of Return Regulation Now Drives Cost in Electrical Utility Business

If you have been in the telecom business for some decades--long enough to remember rate of return regulation--you know how different the business is today.

Some might start wondering whether a shake-up is needed in the electrical utility business that--even decades ago--was widely considered more stodgy than telecom.

Utilities still operate under rate of return regulations, meaning if they invest a dollar, they are guaranteed to earn more than a dollar on the investment.   

Rate of return regulation historically did not promote innovation in the telecom business, and did next to nothing to restrain spending or prices. Some might now be seeing similar problems in the electrical utility business, which despite all efforts has not yet been subjected more to market forces.

Families in New York are paying 40 percent more for electricity than they were a decade ago, the Wall Street Journal reports.  Meanwhile, the cost of the main fuel used to generate electricity in the state—natural gas—has plunged 39 percent.

Prices have not fallen because of rate of return regulations, in essence.

If you are a veteran of the telecom business, you know all about that.