Cost-of-service regulation of electricity distribution services in the US

Paul L. Joskow and Richard Schmalensee

Chapter Chapter 3 in Handbook on Electricity Regulation, 2025, pp 44-67 from Edward Elgar Publishing

Abstract: This chapter discusses US regulators’ use of “cost of service” (COSR) or “rate of return” (ROR) regulation to set allowed revenues of investor-owned utilities and the prices paid by their customers for distribution services. It begins by outlining the structure of the US electric power industry and the basic operations of state regulatory commissions. The core of the chapter provides an overview of the determination of an investor-owned utility’s allowed revenues as the sum of allowable operating expenses and capital-related costs, defined as the utility’s rate base times its allowed rate of return. Retail prices are then set for various classes of customers to enable the utility to earn its allowed revenues. The chapter concludes with discussions of regulatory lag and the performance of cost-of service regulation in practice and of recent developments of performance-based (or incentive) regulation intended to improve performance.

Keywords: Natural monopoly regulation; Electricity distribution; Cost-of-service regulation; Rate-of-return regulation; Regulatory lag; Performance incentives (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035314348
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