Going Deep on Performance-based Regulation

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When America’s Power Plan was released in 2013, our number one recommendation was for utilities to move toward performance-based regulation, shifting utility focus away from capital investment and sales volume, putting focus instead on delivering value for customers—in the form of an affordable, reliable, and clean power system.

Performance-based regulation has been gaining momentum in several states (including Minnesota, New York, California, and Illinois). To support those states and others considering this regulatory change, we have produced several papers and briefs that offer perspective on more of the details of performance-based regulation.

For more information and resources about this subject from a wide community of experts on this topic, see our Ratemaking and Utility Business Models solutions page.


General Resources

Overview: Rethinking Policy to Deliver a Clean Energy Future

Hal Harvey and Sonia Aggarwal; America’s Power Plan
32 pages; 680 KB
APPblankThis paper provides an overview of America’s Power Plan, a platform for policymakers, market operators, and utilities to think through strategies to manage transformation of the power sector. America’s Power Plan covers a set of power-related issues: regional planning, market design, ratemaking and utility business models, and system optimization. A full report of power sector policy recommendations can be found here.
 

Performance-Based Regulation: A Presentation for the National Governors’ Association

Sonia Aggarwal; America’s Power Plan
26 slides; 6 MB
pbr_coverUtility customers are demanding new services from the power sector, and many are contemplating whether cost of service regulation can meet today’s goal of a resilient, clean, affordable, and safe electricity system. Utility regulation has traditionally asked the question: “did we pay the right amount for what we got?” Performance-based regulation (PBR) changes the central question to: “are we paying the right amount for what we want” Under PBR, rather than utility profit increasing as utility investment increases, utility profit increases as performance improves. This presentation highlights a handful of ways to design PBR well, including some examples from Illinois and the UK.
 

Utility Models: Questions For Regulators And Stakeholders To Ask And Answer As Utilities Evolve

Ron Lehr and Sonia Aggarwal; America’s Power Plan
3 pages; 790 KB
Every utility regulatory model has embedded incentives. This list is intended to help state policymakers and other stakeholders pinpoint questions they can ask and answer to explore how incentives from cost of service regulation and performance regulation relate to today’s power system goals.
 
 
 

Getting the Most out of Grid Modernization

Sonia Aggarwal and Mike O’Boyle; America’s Power Plan
7 pages; 140 KB
transmissionpixabay2The prospect of large grid modernization investment triggers a key question – is it worth it? As different states consider upfront investments in modernizing the grid, regulators need ways to ensure utilities maximize the potential benefits of grid modernization in a timely fashion. This white paper provides program design considerations and metrics that can guide utility investment and increase the chances that customers get the most out of grid modernization efforts.
 

New Regulatory Models

Sonia Aggarwal (America’s Power Plan), Eddie Burgess (Utility of the Future Center)
42 pages; 3.7 MB
NewRegulatoryModelsThis paper builds on America’s Power Plan’s “New Utility and Regulatory Models for the Modern Era” to propose new policy and regulatory opportunities for utilities, with particular focus on performance-based ratemaking. The paper includes seven case studies to demonstrate lessons from experience with performance-oriented utility compensation mechanisms, and draws out some principles for policy design. See also this presentation to the National Governors Association from September 2014.
 

Improving Performance in Publicly-Owned Utilities

Michael O’Boyle and Sonia Aggarwal; America’s Power Plan
21 pages; 1.1 MB
PublicUtilityPerformanceThis paper presents case studies about performance management in publicly-owned utilities, drawing out concrete steps that can support municipal utilities, public utility districts, and cooperatives to adapt to changing technology and market trends. These steps – which involve taking “no regrets” actions, exploring evolutions in government, and considering more drastic action if performance lags – can enable POUs to deliver greater value to their customers.
 

You Get What You Pay For: Moving Toward Value in Utility Compensation, Part 1 – Revenue & Profit

Steve Kihm (Seventhwave), Ronald Lehr (Western Grid Group), Sonia Aggarwal (America’s Power Plan), Eddie Burgess (Utility of the Future Center)
23 pages; 1 MB
UtilityCompensationThis paper corrects two misconceptions in the regulatory community: that the utility’s rate of return is the sole value driver for utility shareholders, and that rates of return are set at the cost of equity. Neither of these perceptions is correct. Instead, the financial “value engine” — the difference between a utility’s return on investment and its cost of capital — drives shareholder returns. The authors argue that regulators should use this value engine to align utilities’ financial motivations with delivering value to customers.

You Get What You Pay For: Moving Toward Value in Utility Compensation, Part 2 – Regulatory Alternatives

Dan Aas (University of California, Berkeley), Michael O’Boyle (America’s Power Plan)
61 pages; 1.1 MB
RegModels_coverThis paper applies the utility shareholder “value engine” framework from part one to explore which regulatory models align utility profit with societal value under scenarios in which traditional, utility-owned solutions may not be optimal for customers. The cases in this paper draw on simplified financial models designed to provide high-level insights into whether and to what extent cost of service, rate of return regulation and its alternatives (performance incentive mechanisms and revenue-caps) can align utility shareholder values with societal values.


Incentive Mechanism Design

Given the momentum toward performance-based regulation in several commissions across the country, America’s Power Plan has written three briefs that offer perspective on how regulators might decide to design performance incentive mechanisms for success:

Designing a Performance Incentive Mechanism for Peak Load Reduction: A Straw Proposal

Michael O’Boyle; America’s Power Plan
11 pages; 160 KB
PIMwhitepaper-1Peak electricity demand is a driver of investment in the electricity system, including many of the most carbon-intensive generators called “peaker” units. Peak demand growth also drives utility investment, a key component of utility profits. In this white paper, we examine a straw proposal for a new performance incentive to motivate utilities to reduce peak demand, improving the affordability and environmental performance of the electricity system.
 

Metrics for Energy Efficiency: Options and Adjustment Mechanisms

Robbie Orvis, Sonia Aggarwal, and Michael O’Boyle; America’s Power Plan
10 pages; 100 KB
LEDlightsA key outcome for an affordable, reliable, clean electricity system is the adoption of energy efficient technologies. In many states, utility revenue is linked to energy efficiency, but the programs are bogged down in tedious and controversial evaluation, measurement, and verification requirements. In this white paper, we explore different approaches to simplify the measurement of energy efficiency savings to better align utility incentives with efficiency outcomes.
 

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

Robbie Orvis; America’s Power Plan
8 pages; 100 KB
CA_utilitiesmapWhen designing performance incentive mechanisms, regulators can consider using counterfactuals to measure utility savings. While counterfactuals may be appropriate as an adjustment mechanism, they can also lead to unfair outcomes and unnecessary regulatory conflict. This white paper examines California’s Risk-Reward Incentive Mechanism (RRIM) as a case study, and distills lessons for incentive design.