ORIGINAL REPORTING: Tackling the perverse incentive with cost recovery mechanisms for new technologies

Tackling the perverse incentive: Utilities need new cost recovery mechanisms for new technologies; With new rules, utilities can profit by contracting for services instead of expending capital

Herman K. Trabish, March 6, 2018 (Utility Dive)

Editor’s note: There are hints that regulators across the country have begun to deal with this.

The perverse incentive built into the way regulated utilities recover costs and earn profits is becoming an obstacle to utilities providing the best service to their customers. The perverse incentive rewards utilities with a profit margin for making capital investments, but not for contracted services that might serve customers better. It has become an increasing concern as utilities discover that contracted services for distributed energy resources (DER) and cloud computing may provide more reliable and affordable customer service in certain circumstances. Utilities have skilled engineers, accomplished accountants, and engaging customer engagement specialists. But they often cannot match the technology expertise of private sector DER providers or the data management expertise of IT-savvy cloud computing companies. The perverse incentive makes it detrimental to utilities’ bottom lines to contract for those experts’ services.

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“Utility Earnings In A Service-Oriented World,” from the Advanced Energy Economy Institute (AEEI), proposes new cost recovery mechanisms that could neutralize the perverse incentive. With the right mechanism, utilities could recover costs for contracted services, AEEI says. Those services could accelerate utilities' ability to meet the demands of a 21st century grid. Investor-owned utilities (IOUs) have been kept out of the economy-wide trend toward contracted services because operating expenditures cannot be ratebased, AEEI reports. Paper lead author Danny Waggoner, AEEI senior manager for regulatory transformation, told Utility Dive utilities can even “jeopardize near-term earnings” because contracted services that cause an operations budget overrun reduce earnings. The paper identifies five mechanisms that require regulatory changes to give utilities financial incentives “that better align their earnings with their ability to generate cost savings,” AEEI reports… click here for more

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