The Invisible Price Tag of Yesterday’s Regulation
How public utility regulation's pacing problem squanders innovation and value in the most electrifying decade since Edison
Two snapshots, one static institution
In 1915, Kansas City Power & Light convinced regulators that stringing copper wires across the prairie would bring “abundant, cheap light for every home”. Today, a data center developer requesting 300 MW for a new facility is instructed to join a five-year interconnection queue. While the physical infrastructure has expanded and loads have become smarter, the core regulatory framework—cost-of-service regulation (COSR)—remains stuck in an era defined by rotary telephones.
This institutional mismatch is not mere trivia. Global data center electricity demand, fueled primarily by artificial intelligence workloads, is projected to nearly double to 945 terawatt-hours (TWh) by 2030, more than Japan's current annual consumption. Simultaneously, the U.S. anticipates adding 217 gigawatts (GW) of distributed energy resources (DERs) by 2028, accounting for 70% of new generation capacity. Advanced transmission technologies capable of doubling line capacity remain underutilized, leaving 118,821 miles of existing wires untouched. As technology accelerates forward, regulation lags conspicuously behind.
Of course, thoughtful deliberation is justified. Major investments affecting ratepayers over decades deserve rigorous review, and public participation is a fundamental civic virtue of democracy. Yet technological evolution increasingly challenges how and when regulation should be applied to serve the public interest effectively.
Why traditional regulation is technology-contingent
Early 20th-century regulation was built for a capital-intensive, centralized grid designed for universal service and exploiting economies of scale and scope. Three outdated regulatory assumptions now hinder innovation:
Embedded Asset Bias: Utilities profit from tangible infrastructure rather than digital solutions. A transformer can enter the rate base easily; software enabling EV charging flexibility struggles for recognition.
Rate-Case Latency: Multi-year rate-case cycles clash with rapidly evolving technology, such as weekly software updates orchestrating virtual power plants.
Static Customer Classes: Traditional residential, commercial, and industrial categories fail to accommodate modern organizational realities—hyperscale data centers running microgrids or widespread adoption of EVs and solar+storage.
These inherent characteristics render cost-of-service regulation technology-contingent. When the tech stack changes, these rules become brittle constraints rather than flexible safeguards.
The pacing problem and the concept of opportunity cost
Institutional scholars call this lag the pacing problem: law and regulation evolve incrementally while innovation leaps. The cost of that lag is not only higher bills: it is the opportunity cost of foregone futures.
Opportunity cost isn't static. As society, technology, and economics evolve, the alternatives we give up through stasis gain greater value. Economist Frédéric Bastiat cautioned that policy debates fixate on “the seen” and neglect “the unseen”. Today’s visible benefits—reliable power and stable rates—are increasingly strained. The unseen cost is the innovation and value lost by maintaining traditional regulation in a digital, bidirectional future grid.
Mapping the unseen losses
Consider these illustrative examples highlighting how the opportunity cost of traditional regulation materializes:
Dynamic tariffs and transactive energy: Time-differentiated pricing and automated price response remain uncommon, though millions of EVs could arbitrage wholesale price swings and coordinated PV-EV charging would shrink duck curves.
Grid-enhancing technologies: Upgrading half the untouched transmission lines mentioned above could avoid gigawatts of new generation, reducing land use and resource intensity while also accommodating increasing demand from data centers.
DER market innovation: Scaling virtual power plants (VPPs) could save billions annually, yet regulatory frameworks limit market entry; DOE estimates increasing virtual power plant (VPP) capacity from today’s 30-60 GW to 80-160 GW could save $10 billion/year.
Regional economic growth: Delays force data-center firms to contract directly with generators or build their own power plants (make or buy), limiting local economic benefits in less flexible areas.
Capital efficiency: Regulatory incentives promote investment in physical infrastructure while neglecting digital solutions that could reduce system costs significantly.
A rough back-of-the-envelope calculation suggests the opportunity cost's potential magnitude: If utilities rolled out Conservation Voltage Reduction (CVR) on just half of U.S. distribution feeders, the program would touch roughly 1,930 TWh of the 3,861 TWh that Americans purchased in 2023. Field research finds that CVR trims energy use by 1–4 percent; using a conservative 3 percent estimate delivers an annual savings of about 58 TWh, equivalent to the output of seven large nuclear reactors. Valued at a conservative $40 per MWh, that reduction translates into roughly $2.3 billion each year of savings, achieved through nothing more than smarter set-points on voltage regulators: no new wires, no new permits. This thought experiment in opportunity cost, in the seen and the unseen, suggests that the status quo institutional framework is an invisible tax.
Low-friction, high-return regulatory fixes
Closing the gap need not upend every statute overnight, nor need it abandon the foundational regulatory principles of public interest and consumer protection. A phased approach can chip away at these opportunity costs while preserving regulatory principles. Again, some illustrative examples:
Process tweaks: Enforce a 90-day DER interconnection timeline and mandate open data standards (IEEE 2030.5, Green Button), dramatically reducing queue bottlenecks and empowering third-party solutions. Interconnection queues rather than hardware costs are now the dominant bottleneck for rooftop solar, community storage and flexible EV chargers. DOE’s i2X Roadmap frames the national goal as “cut median study time to months, not years” by 2035. Flexible demand, real-time VPP dispatch and fintech energy tools all depend on machine-readable telemetry and usage data. IEEE 2030.5 provides a secure DER control protocol. California Rule 21 already requires it for smart inverters, and adoption is spreading to Australia and Canada. Green Button Connect My Data (CMD) standardizes interval-billing data sharing; roughly 36 million U.S. customer accounts are now covered.
Incentive realignment: Implement earnings-adjustment mechanisms (EAMs) tied to performance metrics, rewarding utilities for system efficiency and innovation rather than mere capital investment. National Grid’s New York EAMs pay up to $5.9 million for beating DER-utilization and peak-reduction targets; the utility hit the DER metric and collected the full incentive in 2024. This approach requires establishing benchmarks against which to calculate reductions, which is still administrative and artificial but at least aligns utility incentives to reduce total system costs. Hawaii's performance-based rate plan, implemented in 2021, is a multi-year plan indexing revenue and layering on performance incentives plus an expedited pilot cost-tracker. [At some point I'm going to write a whole post on performance-based regulation, but today is not that day.]
Market access: Enable distribution-level transactive tariffs and fully implement FERC Order 2222, monetizing DER contributions and scaling flexible resources. Time-varying and locational retail prices give DER owners a cash signal that matches local grid stress, converting appliances and EVs into grid assets. DOE’s December 2024 paper, Sourcing DERs for Distribution Grid Services, catalogues jurisdictions shifting from static TOU to dynamic, distribution-targeted rates and local flexibility markets. [I will write a post about transactive energy!] With respect to FERC 2222 on integrating retail aggregators into wholesale markets, wholesale markets cannot mobilize flexible load if aggregators are blocked at the distribution interface.
Structural pilots: Explore independent Distribution System Operators (i-DSOs) and time-boxed regulatory sandboxes, facilitating continuous innovation within controlled, low-risk environments. The Camus Energy DSO framework of “local grid management” is an emerging model to consider. Sandboxes lower entry barriers for novel business models while protecting consumers through scale and duration limits, and protect new ideas from “utility death by pilot”. The State of Utah has implemented a regulatory sandbox that “allows businesses to experiment with products, production methods, or services by temporarily waiving state law and allowing entrepreneurs to determine if customers value products that don't fit within the state's current regulatory framework”. In Canada, Ontario’s OEB Innovation Sandbox has issued guidance to dozens of pilots since 2019.
Each example incrementally reduces the unseen opportunity cost, turning potential benefits into tangible economic and societal value. These levers share a common DNA: they price optionality, they bring data to the surface, and they shift utility profit from volume to value creation. None requires a wholesale dismantling of public-utility regulation; each can nest inside existing authority and rate-case calendars. Yet together they chip away at unseen welfare loss: the invisible tax of institutional drag.
Making the invisible visible
Opportunity cost seldom appears explicitly in regulatory deliberations, but it shapes electricity economics significantly. Maintaining yesterday’s regulatory frameworks imposes costs far beyond monetary expenses; it curtails the innovation essential for a resilient, abundant, and low-carbon future. Regulators, legislators, and utilities need not predict every future scenario; they must simply recognize that institutional inertia's unseen cost accumulates, steadily. Each delay adds another line to Bastiat’s ledger, quietly yet persistently raising the invisible price tag of outdated regulation.
Get out of the way, corrupt government!
Thank you for this perspective on opportunity costs of outdated regulation Lynne. In our consulting practice (www.wiredgroup.net), which is dedicated to serving consumer, business, and environmental advocates in for-profit monopoly utility proceedings, we observe a different type of opportunity cost: rate increases associated with unnecessary, premature, and cost-ineffective distribution investments. Such rate increases not only retard economic development, they harm customers' business cases for transitioning to electric vehicles and heating. Retarding economic development and the energy transition is exactly the opposite outcome that alternative ratemaking methods (such as multiple future test years and rider cost recovery) are intended to deliver when introduced by well-meaning state regulators and legislators. When considering regulatory reform, we must consider all types of opportunity costs, including those created by unnecessary and premature rate increases that appear to be unintended consequences of many such reforms (at least in our experience).