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The utility that is currently regulated by a regulatory commission or agency is electricity. The state, federal and local agencies regulate electricity that is delivered to the consumers while at the same time determining the rate of return for the utility. One of the major bodies that perform the duty of regulating electricity rates is the Federal Energy Regulatory Commission (FERC) (McGrew, & American Bar Association, 2009). Regulation of electricity as one of the commonly used utility is done by regulatory agencies and authorities that determine the prices that are charged. Apart from the regulation of prices of electricity that consumers are charged, the regulatory authorities also determine the terms of service to the consumers, the budgets and the various construction plans that have been put in place (McGrew, & American Bar Association, 2009).
Electricity is a crucial utility that needs to be regulated so as to ensure the protection of the consumers from unscrupulous retailers of the utility (McGrew & American Bar Association, 2009). The regulatory rules laid down help in setting the retail rates that are charged on consumers while at the same time helping the retailers to recover the various expenses that they have incurred hence provide them with a rate of return on its capital that can be considered to be “fair.” Regulation of electricity retail rates by government agencies and regulatory commissions is also faced with the problem of allocating the common costs that are involved in the regulation (McGrew, & American Bar Association, 2009).
Furthermore, the utility’s rate of return for the retailers is also affected by the politics, whereby this allows latitude that is involved in the setting of rates for the different consumers in the market (McGrew, & American Bar Association, 2009). The regulation by the government as well as the regulatory agencies and commissions also require that the utility serves all the customers as well as be able in planning expansion and additions of facilities for the purpose of anticipating growth in the market (McGrew, & American Bar Association, 2009). Deregulation has been part of the strategy that has been found to have some impact on the supply of electricity as well as the rates charged on electricity supply and distribution.
According to the “Federal Power Act” (McGrew, J. H., & American Bar Association, 2009), the wholesale price of electricity in addition to the charges on transmission, needs to be based on the costs of production (McGrew, & American Bar Association. (2009). However, due to deregulation, the FERC tends to accept the prices that are set by the markets as long as the set standards by the agency are met. The main reason for this acceptance of prices set by the markets is to encourage and support competition within the industry and reduce monopoly (McGrew, & American Bar Association, 2009).
The deregulation of the industry in general makes economic sense in that when there is sufficient competition. Competition within a market helps in the provision of quality service to consumers because each of the suppliers tries their best to attract customers (McGrew, & American Bar Association, 2009). Therefore, it means that the rates charged on consumers will not be as high as when there is monopoly in the industry. The general policy by FERC of wanting to expand the role played by the markets as well as increase deregulation makes economic sense in terms of revenues that suppliers will make as well as a healthy market for consumers (McGrew, & American Bar Association, 2009).
McGrew, J. H., & American Bar Association. (2009). FERC: Federal Energy Regulatory Commission. Chicago, Ill: American Bar Association, Section of Environment, Energy, and Resources.