In fulfilling their obligation to serve the public, utilities carry out numerous activities that require many skills and areas of expertise. As in any business, some of these activities are performed in-house and some are outsourced. The utility regulator’s responsibility is to establish performance expectations and ensure compliance. Utilities should do what they do best; what they cannot do best, they should outsource or contract to others. Regulators must assess whether the utility’s decision about what activities to keep internal and what activities to outsource achieve this standard.

The premise of this paper is that regulators should periodically ask the question ?Are there some utility functions that others would perform better and then create regulatory policies that induce the utilities to answer this question in a manner consistent with the public interest. Regulators therefore should assess outsourcing and then encourage or discourage it based on whether it enables the utility to carry out its functions more effectively. To carry out this assessment, regulators need to understand what outsourcing is, along with its positive and negative aspects.