ORIGINAL REPORTING: How Minnesota is inching toward performance-based oversight

Performance-based regulation: How Minnesota is inching toward a new oversight model; New insights could slow Minnesota’s cutting-edge move to a performance-based utility business model

Herman K. Trabish, April 24, 2018 (Utility Dive)

Editor’s note: The idea of changing the rules to align utility incentives with customer demand is gaining momentum.

Performance-based regulation needs more work before it is ready to effectively deal with the perverse incentive, according a stakeholder group studying cutting-edge utility oversight proposals in Minnesota. A completely new performance-based regulatory approach may be less effective than innovative alternatives to the existing cost-of-service (COS) regulation, stakeholders told Utility Dive. The perverse incentive is the curse of traditional COS regulation. It rewards regulated utilities with a return on capital expenditures even if they are not the lowest cost approaches to resolving system needs. Performance-based regulation (PBR) substitutes performance incentives for returns on investments, freeing utilities to make choices that might better benefit ratepayers.

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Using performance incentives that link earnings to how well a utility achieves policy goals was a “central recommendation” from a stakeholder process led by Minnesota’s e21 Initiative in December 2016. The e21 initiative includes Minnesota utilities as well as environmental and consumer advocates. But the newest phase of the think tank’s PBR work concluded in April that “this is a very complicated issue” and “we must proceed carefully.” Complicating it are questions about the best performance goals and metrics. The next step should be a formal regulatory proceeding to address the complications, e21's participants agreed. Former Xcel Energy executive Mike Bull was one of the first utility industry leaders to take seriously the dangers of the perverse incentive and call for the study of new utility business models, and helped lead e21’s recent stakeholder roundtable discussions on PBR… click here for more

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