Daniel H. Cole
What is the nature of the relationship between state regulators and regulated electric utilities? This question is at the center of ongoing debates over utility deregulation. Some (for example, Sidak & Spulber, 1997, Ch. 4) argue that the regulatory relationship constitutes a contract. Others such as Michaels (1995, p. 21) claim that the “regulatory contract” is a myth of recent vintage. Both sides agree, however, that the issue is vital. If there is a regulatory contract between states and utilities, then deregulation would, if it substantially altered the terms of the contract, constitute a breach. If there is no regulatory contract, then the government can alter the regulatory system however it wishes (consistent with constitutional due process and property-rights protections) without regard for the costs those changes impose on electric utilities. 1
This chapter suggests that both sides may be wrong. The existence or non-existence of a regulatory contract may be immaterial as far as deregulation is concerned. Whether or not there is a “regulatory contract, ” deregulation (or reregulation) may lawfully modify, terminate, or replace it with a substituted contract; in neither case should there be a compensable breach.
Begin by assuming that there is a regulatory contract between utilities and states, for if there is not then arguments about contract substitution and termination are irrelevant: in the absence of a contract, the state could change its relation
The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry, Volume 7, pages 77-88.
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