Regulatory compact

The relationship between regulators and utilities is often described as the regulatory compact. This means that in return for government regulators granting exclusive service territories and setting rates in a manner that provides an opportunity for a reasonable return on investment, investor-owned public utilities submit their operations to full regulation. While this is not a signed agreement, it is the general understanding between regulator and utility. The exact details are determined by a long history of laws, regulatory decisions, and court outcomes. General provisions include:

• The regulator grants the utility an exclusive service territory

• The utility has an obligation to serve all customers within that territory

• Rates are set to give the utility the opportunity to earn a fair return on shareholders’ investment commensurate with the risk of investing in the utility

• The utility agrees to full scrutiny of its costs and operations by the regulators

• Substantial facility investments by the utility require the regulator’s approval