Rate-Basing

The structure

A utility that owns poles and wires is regulated as a monopoly and guaranteed a return on capital deployed. The more it spends, the more it earns. Nothing about that is hidden or scandalous; it is the deliberate bargain struck to get infrastructure built in exchange for surrendering the right to set prices. But it has a consequence that compounds quietly: if a technology lets the utility do more with less, adopting it reduces earnings. The rational response to a cost-saving innovation is to decline it.

Justin Lopas, who ran manufacturing at Anduril before co-founding Base Power, recognized the shape from defense. Squint a little, he said, and the utilities are kind of similar to the defense primes. Defense calls the model cost-plus and utilities call it rate basing, and the incentive underneath is identical. Zach Dell supplied the compression that the sector has since borrowed: "What you have is an incentive to build but not innovate."¹

The observable output is a rate case. Requested utility rate increases have continued to set records, delivery costs for wires, poles, and substations now absorb more investment than generation does, and electricity prices rose at twice the rate of inflation in 2025.¹

Why this is the thing entrants actually attack

The diagnosis is worth more than the complaint, because it tells you what the incumbent will not do rather than what it does badly. A firm on cost-plus will not adopt anything that reduces billable capital expenditure, no matter how good it is. That is a durable, predictable blind spot, and it is available to an entrant for free.

It also explains a recurring shape across this archive. Anduril attacked cost-plus in defense; Base Power attacks rate basing in energy. Neither began from a technology gap. Both began from an incentive structure that guaranteed the incumbent would decline to close it.

Where energy is harder than defense

Dell and Lopas inherited one complication their template did not have. SpaceX and Anduril could win by being better, because the customer was free to choose them. In electricity, whether a customer may choose at all varies by state. So the attack has a geographic precondition rather than a purely commercial one, which is why Texas and its deregulated ERCOT market became the laboratory, and why the map of retail deregulation, not the product roadmap, sets the pace of expansion.

The unresolved part is worth stating plainly. Transmission inside deregulated Texas is still rate-based, and Base's power still travels those wires to reach the home. The model is being arbitraged rather than displaced. Whether it can be displaced at all is not something the record yet answers.