During the weeks and months following the widespread power blackout affecting millions of people in the Northeast on August 14, 2003, regulators began to rethink their methods of regulating electricity prices. In many locales, regulators using rate-of-return and cost-of-service regulation had allowed utilities to recover costs of past investments only if the utilities agreed to freeze current prices. To keep their current prices low and earn enough revenues to cover their current costs of providing power, utilities had to keep a lid on costs. One way they did this was by cutting back on equipment maintenance and tree trimming near power lines – both of which contributed to the big August 2003 blackout. In this way, methods of regulating utility prices may expose the nation’s electricity grid to greater risk of local breakdown, or in rare cases to more widespread blackouts.

Which theory of regulatory behavior do you think describes what has happened in the regulated electric utility industry in this case?