I recently came across this quote:
There is ... a long-standing, but unwritten, rule that governs cost recovery and lies at the heart of establishing regulated prices. This rule is known as the regulatory compact. Under the regulatory compact, the regulator grants the company a protected monopoly, essentially a franchise, for the sale and distribution of electricity or natural gas to customers in its defined service territory. In return, the company commits to supply the full quantities demanded by those customers at a price calculated to cover all operating costs plus a "reasonable" return on the capital invested in the enterprise.1
This is the formula fed to regulatory newcomers: smooth, sweet and easily digested. But it lacks the essential nutrients. As commonly misused, the phrase "regulatory compact" refers to the regulatory treatment of shareholder investment under the statutory "just and reasonable" standard and the Fifth Amendment's Takings Clause in the U.S. Constitution.2 There is a legal relationship between utility and regulator, and between utility investment and regulator-set rates. But that legal relationship is not "long-standing," it is not "unwritten," and it is not a "rule." To call a "compact" what the Supreme Court has described as "essentially ... ad hoc and factual" is artificially narrow, incumbent-protective, and legally wrong.