The traditional mode of regulation for the electric utility industry is cost-of-service regulation. In this regulatory environment, the utility is recognized as a natural monopoly and is obligated to provide service to all consumers within its authorized footprint. It is regulated by a state utility commission. In return for its obligation to serve, the utility is given the opportunity to receive not only its investment and cost of providing service, but an opportunity to earn a fair return on its investment.

Although the traditional regulatory model was incredibly useful in its day, commissions and utilities need alternative regulatory frameworks if they are to continue providing the quality, reliability and reasonable cost American consumers have grown to expect.