Economic Regulation of Utility Infrastructure

In this paper, Janice A. Beecher examines public infrastructure as having characteristics of both public and private goods that earn a separate classification as a toll good. Utilities demonstrate a variety of distinct and interrelated technical, economic, and institutional characteristics that relate to market structure and oversight. Except for the water sector, much of the infrastructure providing essential utility services in the United States is privately owned and operated. Private ownership of utility infrastructure necessitates economic regulation to address market failures and prevent abuse of monopoly power, particularly at the distribution level. The United States can uniquely boast more than 100 years of experience in regulation in the public interest through a social compact that balances and protects the interests of investors and ratepayers both.

Jurisdiction is shared between independent federal and state commissions that apply established principles through a quasi-judicial process. The commissions continue to rely primarily on the method known as rate base/rate-of-return regulation, by which regulators review the prudence of infrastructure investment, along with prices, profits, and performance. Regulatory theory and practice have adapted to emerging technologies and evolving market conditions. States—and nation-states—have become the experimental laboratories for structuring, restructuring, and regulating infrastructure industries, and alternative methods have been tried, including price-cap and performance regulation in the United Kingdom and elsewhere. Aging infrastructure and sizable capital requirements, in the absence of effective competition, argue for a regulatory role. All forms of regulation, and their implementation, can and should be evaluated in terms of incentives for infrastructure investment and operational performance.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2012 and is Chapter 4 of the book Infrastructure and Land Policies.