Economic Regulatory System

The electricity industry is undergoing consequential change driven by evolving customer expectations around decarbonization, decentralization, digitalization and democratization.


The electricity industry is undergoing consequential change driven by evolving customer and societal expectations around decarbonization, decentralization, digitalization and democratization, or the “4Ds”.

  • Decarbonization is the most prevalent trend in the industry, given the urgency to act on climate change and the meteoric rise of clean energy investments.
  • Decentralization is driving the adoption of microgrids and other distributed energy resources, especially in remote communities with limited access to provincial and territorial grids.
  • Digitalization is propelling tremendous improvements in communications technology to optimize system operations, using advanced technologies such as artificial intelligence, blockchain and robotics. These technologies have reduced costs and enabled greater efficiencies for both energy producers and consumers.
  • Democratization in some jurisdictions is enabling new players to enter the electricity market.

These trends are having a transformative impact on the electricity industry. However, there is a lack of consideration for companies pivoting to address these emerging trends within the existing rate-regulated systems. Although many electricity companies have started to build innovation-based capacities and business offerings through non-regulated subsidiaries, there is a public imperative to allow these innovations to occur within the rate-regulated systems as well. The failure to allow greater risk-taking and innovation by electricity companies to adapt to these changing conditions would be a hindrance not only to industry’s progress and modernization, but also detrimental to customers in terms of the rates they pay, how services are delivered, and the energy management options they have. The most significant issue within this 4Ds transformation is the evolving government and societal expectations around electrification of transformation. This shift to electrification of transportation is accelerating worldwide, and the ability of the electricity sector to effectively meet this growing demand is pivotal to its long-term success. Many electricity companies in Canada are uniquely positioned to support the growth in electric transportation—not only through power production, but also through strategic investments in distribution and fast-charging infrastructure. This again requires greater regulatory innovation through provincial and territorial government directives, in some jurisdictions more than others, to create appropriate rate classes for different charging needs and allow companies to rate-base upfront infrastructure costs associated with deploying fast charges

History of Topic

  • In the first decade of the 20th century, Samuel Insull helped to develop what would become the prevailing economic and regulatory model for the electricity grid. At the time, electric utilities were limited in scale because they primarily existed to serve residential power needs for lighting, which occurred in the evenings and rendered electricity infrastructure idle during the day. While many industries were beginning to use power during the day, they generally chose to self-generate because of the high cost that power companies charged. Insull’s business strategy was premised on increasing overall demand for electricity to enable the purchase of larger electricity generators, which would unlock economies of scale in electricity production, and specifically, could enable him to charge competitive costs for electricity during the day to industrial users. In 1907 Insull acquired 20 other utility companies in the Chicago and formed Commonwealth Edison.1
  • In the first decades of the 20th century, electricity companies on both sides of the border began to consolidate and look much like monopolies that were established in other areas of the economy, most notably the railroad sector. There was growing public disaffection with these companies and perceived abuses of their growing market power. As a case in point, economists associated with the “progressive era” in the U.S. which lasted from the late 1890s to through World War I came to consider such actors as "natural monopolies”, that required such enormous capital investment to maximize economies of scale, that one firm became the optimal number of market participants for the provision of electricity. For instance, to have competing railroads, water or electric utility infrastructure in single jurisdictions was seen as wasteful and inefficient for the end consumer, and so, utility companies were granted monopolies over various regions in Canada and the U.S., overseen by regulatory commissions that regulated investments based on achieving the lowest end cost to consumers.

Why do we need to update the largest machine on earth?

  • The electrical grid has constantly evolved to meet the needs of society over the past 150 years. It has enabled our modern lifestyle by reliably powering new technologies and fueling economic growth. The electrical grid is once again in a state of transformation, evolving to power a host of new technologies such as electric vehicles, and to integrate new generation sources, such as customer-owned rooftop solar panels and storage devices.
  • The grid is expected to deliver new benefits important to society, such as carbon free power, and energy for a host of clean technologies, and as a source of clean electrification for formerly fossil fuel dependant industrial sectors.
  • The challenges are significant. For example, Environment and Climate Change Canada (ECCC) estimates that the country will need to produce 2 or even 3 times the amount of emissions free electricity to meet its Net Zero 2050 targets.2 This will mean, as it has in the past, the buildout of our electricity grid to bring clean energy from where it can be produced, to where it is used.
  • It will also mean a grid that looks different than it did before. For instance, in remote and rural communities where grid connections are not feasible, traditional reliance on dirty and polluting diesel generators will increasingly be phased out by microgrids using 100% renewable energy and a combination of storage, solar, wind and other emerging energy technologies. For instance in 2020 the International Renewable Energy Agency (IRENA) published research showing that these grids are increasingly becoming cost-competitive solutions. The levelized cost of electricity (LCOE) of renewable mini-grids ranges from USD 0.39 per kilowatt-hour (kWh) to USD 0.75/kWh, with prospects of decreasing to USD 0.20/kWh by 2035. These compare to USD 0.35/kWh-USD 0.70/kWh for those based on liquid fossil fuel generators.3
  • It is important to note, that just like in the past, a modern grid can again fuel economic and social development in Canada. As a case in point, researchers from the University of Calgary and Simon Frasier University note that mini grids require local workers and operations personnel to function successfully.4
  • Recent work by Princeton University estimates that between 2020 and 2030, in a “business-as-usual” scenario, $9.4 trillion will be spent on renewing the U.S. energy system.5 To reach a trajectory for net-zero emissions by 2050, the country would need to invest only an additional 3% (or $300 billion). This is an important point, and it highlights the significance in making that extra investment beyond marginal cost that will provide the very non-marginal return of preventing climate change. The electricity grid in Canada also needs renewal and it would be wise to enable our electricity companies to make the additional investments over replacing like-for-like. Ultimately, this additional investment will have to come from somewhere, and given the decades-long lifespan of electricity infrastructure, we need to make the decision sooner rather than later. However, the mandates of most provincial and territorial regulatory commissions oblige them to review sector investments with a sole focus on limiting financial costs, even if these limited investments fail to address broader social objectives.

Federal Government

  • Establish a mechanism for federal/provincial and territorial electricity policy coordination: The current federal/provincial and territorial ministerial forums on energy (Energy and Mines Ministers Conference, or EMMC) and environmental issues (Canadian Council for Ministers of the Environment, or CCME) have not been successful in driving regulator approval of innovative electricity industry projects. Thus, it is imperative that the two forums prioritize this issue at their upcoming meetings, consider creating a joint consultative mechanism to coordinate policy responses to issues of national interest, and secure provincial and territorial buy-in for subsequent directives to energy regulators. The federal government is well suited to collaborate with provinces and territories on issues such as smart-grid investments, small modular reactors, battery storage, electrification and hydrogen. Provincial and territorial directives would help electricity companies advance the policy objectives of the respective governments.
  • Simplify innovation-related funding: Instead of creating winners and losers through burdensome government funding application processes, identify priority issues (e.g., energy efficiency, electrification, hydrogen), find delivery agents (e.g., electricity companies) and allocate federal dollars based on an appropriate formula (e.g., on a per capita/customer basis). This would be a win-win-win proposition for government, companies and customers.

Provincial and Territorial Governments

  • Issue policy directives to regulators: Go beyond traditional electricity-related statutes (e.g., Energy Board Act) and issue timely policy directives to encourage regulatory innovation and related processes. This would allow regulators to consider innovative electricity sector projects to meet government policy objectives, support research and development efforts, enhance nimbleness and agility in the regulatory processes, and reduce time and costs associated with rate applications.
  • Establish non-adversarial regulatory systems: This would enhance trust and collaboration among key players, with the aim of achieving government policy priorities and providing value to customers. Provincial and Territorial Energy Regulators
  • Take a system-based approach to regulatory approvals: Consider the role of the electricity industry in meeting national decarbonization goals and allow for innovative initiatives that would help achieve broader environmental, social and economic goals.
  • Incentivize digital transformation: Current regulatory constructs do not incentivize investments in digitization. For instance, cloud services, because they are not bricks and mortar investments, are often not eligible for regulated rates of return; therefore, investments in these systems are not prioritized, despite such investments often offering cost-savings and efficiency benefits.


1 Source:

2 Source:

3 Source:

4 Source:

5 Source: