Plug-in hybrid electric vehicles are poised to allow, for the first time, large-scale interaction between the transportation and electric utility sectors. Electricity is a more efficient vehicle fuel than are liquid fossil fuels, and it can reduce system-wide greenhouse-gas emissions by transferring energy demand and emissions from the transportation to the electric utility sector. Furthermore, PHEVs represent a new type of load for electric utilities that can ultimately result in increased utilization of renewable generation. Since PHEVs would be charged primarily at night when California’s wind resource is strong, PHEVs could further offset emissions by using power with a lower GHG emissions intensity than California’s average electricity mix. However, although PHEVs offer a way for reducing system-wide GHG emissions, mitigating utility rates, and possibly increasing revenues, these benefits cannot be fully realized under California’s existing regulatory structure. As the market penetration of PHEVs rises, so do electricity demand and GHG emissions from the electric utility sector. These trends conflict with regulatory requirements that require significant reductions in statewide GHG emissions and are designed to encourage energy efficiency. This tension creates an interesting problem for the electric utilities: what is the best way to reconcile the increase in electricity demand and subsequent increase in power-sector GHG emissions due to PHEV penetration in the utility sector under California’s regulatory structure? Here, we explore this issue and suggest policy and regulatory alternatives that the State could pursue to encourage electric utilities to invest in both end-use efficiency and PHEVs.