An Alternative Electric Utility Structure: Incentivized Management and the Principal-Agent Problem

An alternative electric utility regulation structure is proposed where the Chief Executive Officer (CEO) of an electric utility is given a bonus based on cost reductions, expansion of service and debt reductions for the utility, with the possibility of a reduction in the bonus for service disruptions. The bonus can also be used to reduce government subsidies. This type of bonus-based regulatory mechanism contrasts distinctly with past utility structures such as a government owned utility, a regulated private utility where the price is set equal to average cost plus a profit share, or the current competitive utility structure where a private or government owned power grid dispatches electric power from competitive generators. The idea presented here is that a bonus structure for a regulated utility will turn a manager of a utility from a mere administrator into an entrepreneur motivated to create efficient low cost generation capacity with better grid coordination.