Electric utility price regulation in the United States has historically entailed a state regulatory commission overseeing a utility's rate structure by setting an allowed rate of return for the utility on its invested capital. Although state commissions typically have the power to disallow recovery by a utility of imprudently incurred expenses, the current regulatory system was not designed to encourage utilities to control costs. In search of ways to promote efficiency in electricity production, a number of state regulatory commissions have turned their attention from retrospective second-guessing of utility management to "incentive regulation" approaches, which condition financial rewards or penalties upon some measure of a utility's performance.
Paul L. Joskow & Richard Schmalensee,
Incentive Regulation For Electric Utilities,
Yale J. on Reg.
Available at: http://digitalcommons.law.yale.edu/yjreg/vol4/iss1/2