This paper examines the history of cost of service regulation in the investor-owned electric utility industry. Its purpose is to provide perspective on the issues facing utilities, their customers, and their regulators today. Section I, ―Introduction,‖ describes Cost of Service Regulation (COSR) as an ongoing equilibrium process that is forever rebalancing the relationship between customers and investors. Although observers have periodically argued the need for ―reform,‖ COSR has proven remarkably resilient and useful—precisely because it has responded in a pragmatic fashion to new issues as they have arisen.

Section II, ―The Structure of Cost of Service Regulation,‖ describes the development, through the Supreme Court‘s Hope decision in 1944, of a core structure that has endured through the present time. The Court in Munn v. Illinois (1877) first acknowledged the need to protect the public from the exercise of monopoly power by railroads, although the means for such protection (what was to become COSR) was not available in 1877 and had to be developed through a process of trial and error. In Hope, the Court recognized that the regulatory contract involved a balancing of interests between investors and consumers. The Court recognized that regulators need to be free to employ a wide range of methods to ensure that the bargain is preserved under changing economic conditions. It is the end result, not the methods employed, that is the regulator‘s responsibility.