ORIGINAL REPORTING: Harvesting hybrid solutions from performance-based rates
Harvesting hybrid solutions from performance-based rates: 'Not all or nothing'; While performance incentives can't "bribe a utility into being something fundamentally different," they can fundamentally reduce the friction of transition.
Herman K. Trabish, July 24, 2019 (Utility Dive)
Editor’s note: Hybrid performance continue to emerge while policymakers watch the slow steady progress of pure PBR in Hawaii.
The work to transition the utility compensation model from traditional to performance-based ratemaking (PBR) is giving rise to a range of hybrid models, though PBR advocates continue to push for a more transformative regulatory framework.
Traditional cost-of-service regulation (COSR) allows utilities to include a shareholder benefit, typically around 10%, to regulator-approved customer rate increases for infrastructure investments. PBR would incentivize utilities to meet policy goals and customer demand through actions that don't include capital expenditures.
"Using performance incentives to transform the utility business model is a response to rising capital costs, weakening revenues and disruptive new technologies," Pace Center for Energy and Climate Executive Director Karl Rabago told Utility Dive. "Incentives can drive market transformation if they give utilities new earnings opportunities."
With growing penetrations of variable renewables, distributed energy resources (DER) and energy efficiency, utilities see the opportunity to respond to the conditions Rabago described through PBR mechanisms. Those mechanisms better align utility incentives with public policy and customer demand, utilities and others told Utility Dive.
But efforts around the country to revise traditional regulation, as described in part one of this series, may not lead to the envisioned distribution system platform open to third-party providers and peer-to-peer energy exchanges, some stakeholders said. Instead, PBR concepts may be the leverage needed to transform traditional regulation and deliver more of what customers want and policymakers require, they told Utility Dive.
As the traditional utility paradigm shifts, many utilities see benefits from PBR components, but do not see a complete transformation of the traditional business model as practical. Traditionally-regulated service costs will be met through energy efficiency and small revenue adjustments instead of through large rate case revenue adjustments. And Massachusetts is expected to add PIMs that deliver more customer benefits, like technologies that make the distribution system more flexible… click here for more
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