Should Utilities Have Guaranteed Profits? Rethinking the Regulatory Compact
You flip your light switch and like magic your home is filled with light. In those split seconds, you might not pause to consider the puzzle that keeps your power humming 24/7. At ACP, we know energy policy isn't just an abstract battle fought in distant boardrooms. It's about your rates, your service, and even the air you breathe. So, let's pull back the curtain on a question that's shaping the future of our energy markets: should utilities have profits baked in by design, or is it time to rewrite the old rulebook?
Understanding the Regulatory Compact: Where Did Guaranteed Profits Begin?
For years, the regulated utility model has been the backbone of the electric grid. Under this system, utilities operate as the sole provider for a region in exchange for reliably delivering electricity at set rates. In the early days, this trust made sense, huge investments were needed to lift cities and towns out of the darkness, and guaranteed profits were dangled to entice investors willing to take a risk.
This is what’s known as the regulatory compact. As explained by resources like the American Council for an Energy-Efficient Economy, this setup provided steady income for utilities, but also incentivized them to pour money into infrastructure, whether it was actually needed or not. Put plainly, the more they spent, the more they earned. That was handy for building power lines in 1920, but is it right for you in 2024?
The Averch-Johnson Effect: When Spending More Means Earning More
Because investor returns are tied to how much companies spend, the "Averch-Johnson effect" pops up. If you’ve ever scratched your head wondering why brand new poles or wires are swapped out for fancier versions, even when the old ones work just fine, you’ve felt this effect in action. According to an eye-opening analysis by the American Enterprise Institute, the current system usually motivates overbuilding simply because it fattens the bottom line, not because it delivers value to customers like you.
The world has moved on. With climate change and new energy tech reshaping the landscape, chasing higher profits through endless infrastructure spending is less sensible than ever. Sometimes, the old ways just don’t fit anymore, like trying to wear your high school jeans well into adulthood.
The Energy World Is Evolving But Regulation Isn’t Keeping Up
Think about recent breakthroughs: solar panels on people’s roofs, smarter meters, renewable energy everywhere you look. The industry is racing ahead, but regulation hasn’t always kept pace. The Natural Resources Defense Council brings up a very real issue-when utility profits hinge on bigger sales and endless additions to the grid, those same companies often push back against energy efficiency and customer-owned renewables. It’s not cynicism; it’s a matter of incentives.
We see, time and again, that states sticking to strict monopoly models often lag in innovation and cost savings. But in areas where open competition is allowed? Competitive electricity markets deliver more flexibility and better results for everyone involved.
What’s the Real Cost? Are You Paying for Outdated Policies?
The money you spend on your power bill doesn’t always reflect the service or value you receive. Organizations like RMI have pointed out that profits should be tied to value, not spending. If the utility gets paid more for every new project, even unnecessary ones, it’s you who foots the bill. No surprise then, that innovation, sustainability, and even consumer choice can all get sidelined.
With guaranteed profits in play, utilities can lack urgency for creative problem-solving, whether it's about reliability, climate change, or affordability. In sharp contrast, ACP’s research shows that open, competitive markets typically bring slower price hikes, fewer blackouts, and more rapid drops in emissions. That’s the kind of progress customers want to see and so do we.
Performance-Based Regulation: Modern Incentives for Modern Problems
The old system is showing its cracks, which is why more people are rooting for performance-based regulation (PBR). Imagine a setup where a utility earns its rewards by smashing targets that actually matter, think lower bills, fewer outages, or more clean energy, instead of by simply building more stuff.
The Sightline Institute sums up how PBR flips old incentives on their head. It means utilities are paid for results, not just actions, and are even held accountable if they miss the mark.
Clear goals for affordability, reliability, and emissions are set ahead of time
Extra profits for beating those goals not just breaking even
Penalties if promised results don’t materialize
This way, utilities can thrive without leaving creativity or customer priorities by the wayside.
Competitive Markets: The Proof Is in the Pudding
If you love a good case study (and who doesn’t?), check out our recent findings. When comparing classic monopoly states to places where customers can pick suppliers, the benefits are clear as day:
Electricity rates in competitive areas rise more slowly over time
Carbon emissions from the power grid drop about 10% faster
Customers experience fewer service interruptions-5% fewer, in fact
Need more proof? Peek at another of our real-world stories in our success analysis of open electricity markets.
What Can You and Leaders Do About It?
Change won't happen overnight and sure, there are hurdles. But progress looks like this:
Work together to set clear goals for reliability and sustainable, affordable energy
Develop ways to track utility performance using honest, transparent measures
Balance what’s best for utilities, consumers, and society at large
Back open competitive markets where they make sense
Bring all voices into the conversation regulators, consumer champions, utilities, and creative disruptors
At ACP, we understand that utilities must remain financially strong but let’s not forget to realign their incentives to match today’s needs. Embracing PBR or even shaking things up with full-fledged market competition could be the secret to marrying stability with forward-thinking innovation.
Frequently Asked Questions
Why did utilities ever get guaranteed profits to begin with? If you think back to the early days, infrastructure was risky and expensive. Those guarantees lured in investments and kept the lights on. But the world’s changed, and so should the rules. Learn more about that history in our deep dive on utility monopolies and what it means for you.
Are utilities still natural monopolies in 2025? If you’re in a rural area with just one set of power lines, then yes they can still be considered natural monopolies. But new tech and policy changes are opening doors to more competition and choice everywhere else.
Do competitive markets always lower power rates? No promises but healthy competition usually nudges companies to do better, whether it’s on price, service, or tech upgrades. Over time, it gives you more bang for your buck.
How could performance-based regulation help battle climate change? By connecting utility profits to things like cleaner energy, emission reduction, and grid efficiency, PBR encourages behaviors that fight climate change without sacrificing service or reliability.
How can you, as a customer, have a say in utility regulation? This is your grid and your bill. Lend your voice to advocacy, shoot feedback to regulators, and champion reforms that put you at the center. Reach out to us at ACP for ways to get involved in shaping your energy future.
Conclusion: It’s Time for a Smarter Approach
When you step back, the debate over guaranteed profits isn’t just about dollars and cents, it’s about building a more dynamic, affordable, and clean energy future for everyone. The regulatory compact got us this far, but today’s challenges cry out for regulatory creativity and open-mindedness. At ACP, we’re champions for bold ideas: competitive markets, performance-based rewards, and regulatory systems that keep utilities healthy while centering the needs of people like you. Want to make waves? Contact our experts today or dive into the latest news on energy markets and reforms to stay in the know.
