Avoiding Counterfactuals in Performance Incentive Mechanisms: California as a Case Study

This white paper is the first in our Incentive Mechanism Design series, which offers perspective on how regulators might decide to design performance incentive mechanisms for success. The paper examines California’s Risk-Reward Incentive Mechanism (RRIM) as a case study to show that, while counterfactuals may be appropriate as an adjustment mechanism, they can also lead to unfair outcomes and unnecessary regulatory conflict.