Regulatory compact

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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