ORIGINAL REPORTING: Looking At New Rates To Unlock The Utility Of The Future

Can performance-based regulation unlock the utility of the future?; Fewer rate cases and smart performance incentives could drive utilities to innovate, according to a new paper

Herman K. Trabish, March 17, 2016 (Utility Dive)

Editor’s note: This type of effort is likely to accelerate during the Trump administration as the energy sector’s attention moves to the state level>

As new energy technologies proliferate and eat into electricity sales, utilities and regulators are searching for a rate design that addresses growing load defection. Regulators are increasingly considering performance-based regulation as the key get more reliance on energy efficiency, peak load management, distributed generation and storage because it is becoming more difficult to make the longstanding cost-of-service regulation work. With cost-of-service regulation, a utility’s revenues come from investment backed by a guaranteed rate of return built into its rates. With this structure, utilities do not get financial incentives to address evolving electric industry challenges such as changing customer demands, growth of distributed energy resources, and changing federal and state policies.

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Creative rate alterations, from cost trackers to decoupling, are attempts to remedy this shortcoming. They have been so widely adopted that there is no longer “pure” cost-of-service regulation. Performance-based regulation is a more comprehensive alternative. It is based on strong performance incentives and a pre-set long-term rate escalation. The aim is to change how rates are set to streamline regulatory burdens and allow utilities more flexibility to innovate. When it works, the utility and its customers share benefits. It is not a one-size-fits-all construct and can be applied in different ways… click here for more

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