ORIGINAL REPORTING: A Stakeholder-Driven Change In Thinking For Regulators
Upheaval in utility regulation emerging nationally as Hawaii proves a performance-based approach; Plans to reward utilities for what they do, not what they spend, are moving ahead in 13+ states
Herman K. Trabish, July 5, 2022 (Utility Dive)
Editor’s note: The basic idea is to replace rewarding utilities for building electric infrastructure with rewarding them for delivering it.
Many states are working on regulatory reforms focused on utility performance, but some compromise approaches may be self-defeating, performance-based regulation, or PBR, consultants said.
“A future power system that is affordable and optimally integrates clean energy requires changing the current incentives that reward utilities for spending,” said Strategen Consulting Managing Director, U.S. Consulting, Matt McDonnell, who helped lead Hawaii to the U.S.’s only full PBR implementation to date. “Recognition is emerging even in the utility industry of PBR as a solution to that spending bias.”
New PBR incentives would align utility rewards with achieving public policy goals, advocates contend. But entrenched commitments by power system incumbents to traditional cost of service, or COS, regulation that rewards utilities with guaranteed profits for capital infrastructure investments is forcing compromised reforms in places like Illinois and North Carolina that worry regulatory analysts.
COS “thinking and mechanisms are deeply entrenched” because utility returns based on spending “was reasonable when basic infrastructure was needed,” PBR consultant and former Texas utility executive and regulator Karl R. Rábago told Utility Dive. “Well-designed PBR can allow utilities to earn by meeting new needs like equity, decarbonization, and modernization with innovation instead of spending.”
PBR can undo COS’s bias for capital expenditures and against new low-cost distributed technologies, but reforms must be carefully designed, regulatory analysts said. Limited PBR elements like performance incentives can align utility interests and societal goals, but without a full PBR process and framework, unintended consequences may drive regulators back to COS.
Both full and limited approaches to PBR are being explored in current efforts around the country… click here for more