By design, utilities are regulated entities with a business model that incentivizes the building of assets like power plants, substations, transmission towers, etc. All the money utilities spend to ensure safe, reliable and affordable electricity is rewarded with a return on investment for the utility and its shareholders.
This business model is usually referred to as Cost of Service Regulation (COSR). According to the National Association of Regulatory Utility Commissions (NARUC), under COSR, the regulator determines the Revenue Requirement—i.e., the “cost of service”—that reflects the total amount that must be collected in rates for the utility to recover its costs and earn a reasonable return. This model has been in place for over 100 years, and its structure has conditioned utilities to look to infrastructure as the way to grow.
But with the advent of energy efficiency (EE) and distributed energy resources (DERs), this model of asset deployment and expected returns is changing. Regulators still expect utilities to provide safe, reliable and affordable power but they’re also asking utilities to help customers use less without due consideration for how it impacts their bottom lines. Many states provide utilities incentives to increase energy efficiency. Some are even providing incentives for a more complete shift in their business model. These states also serve as a kind of roadmap for other utilities to follow.