Nextgeneration performancebased regulation emphasizing utility performance to unleash power sector innovation david littell, camille kadoch, phil baker, ranjit bharvirkar, max dupuy, brenda hausauer, carl linvill, janine migdenostrander, jan rosenow, and wang xuan regulatory assistance project owen zinaman and jeffrey logan. Optional performancebased regulation of certain utilities. At the nrc, performancebased regulatory actions focus on identifying performance measures that ensure an adequate safety margin and offer incentives for licensees to improve safety. Although they each work differently, they all reduce the incentive for utilities to strive for cost efficiency and capital productivity. From the emergence of consumers becoming producers through distributed energy networks, to fluctuations in oil and natural gas prices, to changing regulatory demands globally, leaders in this segment face significant challenges and uncertainty. Generally, performancebased contracts are developed to help define the utility development goals. Economic regulation of quality in electricity distribution networks, utilities policy, elsevier, vol. The cost of complying withenvironmental regulation can be significant anddetrimental to shareholder wealth maximization. Performance based ratemaking is a utility businessmodel shift that rewards utilities for performing well on key metrics, such as efficiency, customer service and greenhouse gas emissions reduction. Our 2018 report will help you benchmark your vendor risk management program and its performance against trends in the market and best practices.
Because of the incentives inherent in traditional regulation, utilities are unlikely to support new programs and technologies for ders resources. Performancebased forms of regulation may include, but not be limited to, fixed or capped base rates, the use of revenue indexing, price indexing, ranges of authorized return, gas cost indexing for gas utilities, and innovative utilization of utilityrelated assets and activities such as a gas utilitys offsystem sales of excess gas. Emerging lessons on performancebased regulation from the. Performance based regulation pbr is an approach to utility regulation designed to strengthen utility performance incentives. Why performancebased regulation is important for the. This bill, which failed to become law in the 114 th congress, included the following provisions that could easily be exported to an fra reform bill. Performancebased regulation options regulatory assistance. Performancebased regulation pbr is a regulatory framework designed to better align the financial interests and actions of regulated utilities with public interest objectives and consumer benefits. Power and utilities accounting, financial reporting, and tax. A way to achieve continuous improvement at regulated utilities. The two most common forms of pbr are awardpenalty mechanisms apms and multiyear rate plans mrps. Performancebased regulation is helping regulators and forwardlooking. In many territories performancebased contracts for power supply and demand reduction now replace traditional utility solutions. Performancebased ratemakings focus on delivering value, rather than accounting for costsaligns the goals of customers, regulators, and utilities.
Multiyear rate plans mrps performance incentive mechanisms pims these are often used together. While utilities have historically held sole custody of power planning and management, energy service providers, tech, implementors, and aggregators are increasingly involved. Power and utilities accounting, financial reporting, and. Performancebased regulation free definitions by babylon.
Why utilities should push for performancebased regulation. Performancebased regulation a regulatory approach that focuses on desired, measurable outcomes, rather than prescriptive processes, techniques, or procedures. A pbr framework rewards utilities for achieving welldefined outcomes performance metrics as opposed to simply incentivizing capital investment. And while some of the years power and utilities industry trendscyber risk, scrutiny from regulators, natural disasterswill continue into the new decade, 2020 will likely bring opportunities for the power and utilities industry to lead the clean energy transition. Competition in energy commodity is, to some extent, transforming captive ratepayers into customers.
The relationship between the environmental and financial. As its name implies, performancebased regulation pbr is a regulatory approach that focuses on performance, as well as the desired results and outcomes. A california case study, applied energy, elsevier, vol. Also known as decoupling, revenue regulation sets utility revenues based on factors other than the megawatthours of throughput. Emphasizing utility performance to unleash power sector innovation, author logan, jeffrey s and zinaman, owen r and littell, david and kadoch, camille and baker, phil and bharvirkar, ranjit and dupuy, max and hausauer, brenda and linvill, carl and migdenostrander, janine and rosenow, jan and xuan, wang. One emerging solution is performancebased regulation pbr, a revenue model that rewards utility performance in meeting policy priorities, such as cost containment and ghg reductions. Emerging lessons on performancebased regulation from the united kingdom the effort to combine utility operating and capital expenses into one capped revenue bucket is showing promising early results.
Electric utilities today must contain costs at a time when many need to modernize aging systems and all face major changes in technologies, customer preferences and competitive pressures. New research from american council for energyefficient economy and energy innovation investigates novel state approaches to performancebased regulation that encourage utilities to deliver energy. Performancebased regulation has been gaining momentum in several states. Performancebased regulation should provide a greater value for shareholders and customers and the first to benefit from these new business models. Performance based regulation should provide a greater value for shareholders and customers and the first to benefit from these new business models will be forwardthinking utilities who. The states eo program, pa 295, gave the commission the ability to approve financial incentives for rateregulated utilities when they exceed energy savings. Under pbr, rates are set on a utilitys performance on various measures, such as reliability and customer service as well as costs. Apr 17, 2014 performancebased ratemakings focus on delivering value, rather than accounting for costsaligns the goals of customers, regulators, and utilities. Performancebased regulation regulation designed to improve utility performance with stronger incentives pbr is a term used to cover a variety of mechanisms to improve incentives and performance two common components of pbr. Using an asset management system with a standardsbased platform allows utilities to roll these applications directly into their standard supported. Performancebased regulation is helping regulators and. Most utility executives feel a responsibility to the greater community, not just to shareholders, so they.
Most commissioners and puc staff, however, still adhere to the now over fifty year old regulatory principles outlined. Going deep on performancebased regulation energy innovation. The program, affectionately called riio revenue set to deliver. Mar 21, 2019 performance based regulation a regulatory approach that focuses on desired, measurable outcomes, rather than prescriptive processes, techniques, or procedures.
Performance based ratemaking could also change the traditional generation mix and end resistance to distributed generation and energy efficiency if utilities get a clear signal those are. Performance based regulation pbr is a regulatory framework that attempts to align the behavior and financial interests of regulated utilities with public interest objectives and consumer benefits. Automatic rate adjustments based on total factor productivity performance in public utility regulation, in problems in public utility economics and regulation, michael a. Executing on this best practice can be challenging without the right tools and structures in place.
Performancebased ratemaking pbr, an emerging regulatory. Advancing efficient and equitable approaches to update the utility business modelmotivated by emerging technological, policy and market conditions in the electric power sectoris crucial to the grids transition to a more secure, clean and affordable customercentric system, according to a new report released today. Pbr stands for performancebased ratemaking,6 a particular technique through which utility regulators set the rates which utilities may charge to their customers. If a utility does not meet its performance goals, the regulatory commission may seek to reduce the utilitys roe. For that reason alone, mapcon public utilities maintenance software is an indispensable ally for these agencies in carrying out their responsibilities. Thus defined, the term pbr is synonymous with incentive regulation. Performancebased ratemaking for electric utilities. Energy and utilities companies are experiencing an intense period volatility and transformation. Deloitte power and utilities accounting, financial reporting, and tax research guide u. The regulatory assistance project, performance based regulation for distribution utilities, december 2000. The desired behaviors, or outcomes, are generally 1 lower costs, 2.
Pbr is on the rise, with policy efforts in more than 19 states and the district of columbia, including recently launched efforts in minnesota and colorado. If designed properly, performancebased contracts can help lay the basis for the longterm sustainability of the utilities. At the nrc, performance based regulatory actions focus on identifying performance measures that ensure an adequate safety margin and offer incentives for licensees to improve safety. As such, pbr differs from the traditional, prescriptive regulatory approach in that it emphasizes what must be achieved, rather than how the desired results and outcomes must be obtained. Report shows new utility business models are key to energy.
Aug 24, 2014 performance based consumer law is more than a technocratic exercise. The lack ofconsensus in this literature can be attributedto several factors. Americas utility of the future forms around performance. There are various forms of price regulation, including rateofreturn regulation, pricecap regulation, and revenuecap regulation. Globally, there is an increase in performancebased regulation, in which power providers earn more by delivering on policy objectives such as energy efficiency or system resilience, rather than earning a profit based only on capital costs or volume of sales.
Performancebased regulation for electric utilities also coincides with retail open access and nascent competition, requiring companies to satisfy energy users like never before. One positive step would be to enact legislation similar to the truck safety reform act, which was aimed at moving trucking safety regulation toward a performancebased philosophy. New utility business models including performance based. Performance based regulation is helping regulators and forwardlooking.
In 2019, natural gas dominated the us power generation mix, as wind and solar saw a rise in capacity. How should we structure performance based regulation of utilities. Toward performancebased transportation safety regulation. Background and staff guidance on performancebased regulation. Utilities cant guarantee revenue through demand growth, but a solution exists. Generally, performance based contracts are developed to help define the utility development goals.
Utilities will be evaluated on clean energy, customer engagement. Americas utility of the future forms around performancebased. More states explore performancebased ratemaking, but few. Open source software development is a model that encourages. The resurgence of performancebased ratemaking march 20. It is based on and in operation would reinscribe a normative vision of consumer law that places consumers at the center. Performance based ratemaking pbr is a form of utility regulation that strengthens the financial incentives to lower rates, lower costs, or improve nonprice performance relative traditional regulation, which the authors call costofservice, rateofreturn cosror regulation.
May 18, 2015 performancebased regulation should provide a greater value for shareholders and customers and the first to benefit from these new business models will be forwardthinking utilities who. As its name implies, performance based regulation pbr is a regulatory approach that focuses on performance, as well as the desired results and outcomes. Performancebased ratemaking pbr is a form of utility regulation that strengthens the financial incentives to lower rates, lower costs, or improve nonprice performance relative traditional regulation, which the authors call costofservice, rateofreturn cosror regulation. State performancebased regulation using multiyear rate plans. Performance based regulation pbr promotes a shift from cost of service to value of service and provides a way for utilities, customers, and broader society to meet their respective goals.
Utility regulation varies to some extent by state public utilities commission puc, or their equivalent. This is the first of a twopart series on performancebased ratemaking. Equilibrium fuel supply and carbon credit pricing under market competition and environmental regulations. The resurgence of performancebased ratemaking march. Electric utilities, author lowry, mark newton and makos, matt and deason, jeff and schwartz, lisa, abstractnote electric utilities today must contain costs at a time when many need to modernize aging systems and all face major changes in technologies, customer preferences and. States lead the way on utility regulation that can cut. Feb 05, 2020 new research from american council for energyefficient economy and energy innovation investigates novel state approaches to performance based regulation that encourage utilities to deliver energy. A webinar recorded on august 4, 2017, can be viewed here. Successful performancebased regulation, according to the regulatory assistance project, requires clear measurement methods and an approach that monitors outcomes, not just input metrics such as spending on wellintentioned programs. Using an asset management system with a standards based platform allows utilities. How should we structure performancebased regulation of utilities. The effort to combine utility operating and capital expenses into one capped.
Nov 12, 2018 to understand utilities, it is important to recognize at least the basic nature of regulation. It focuses, in particular, on how to design and evaluate pbrs that. An effective third party risk management program is in the interest of all organizationsregardless of size, industry, and number of third party providers. In many states, performancebased regulations, which require setting metrics and. Public utilities produce services that are consumed by the public must ensure uninterrupted service and therefore require an extensive and expensivetomaintain infrastructure network. Oct 23, 2017 performance based regulation pbr is a regulatory framework designed to better align the financial interests and actions of regulated utilities with public interest objectives and consumer benefits. Emerging lessons on performance based regulation from the united kingdom the effort to combine utility operating and capital expenses into one capped revenue bucket is showing promising early results.
State performancebased regulation using multiyear rate. In many territories performance based contracts for power supply and demand reduction now replace traditional utility solutions. Leading states have designed new ways to help utilities. Successful performance based regulation, according to the regulatory assistance project, requires clear measurement methods and an approach that monitors outcomes, not just input metrics such as spending on wellintentioned programs. Dec 03, 2015 performance based regulation pbr promotes a shift from cost of service to value of service and provides a way for utilities, customers, and broader society to meet their respective goals. The term performance based regulation is the most recent in a long line of vocabulary used to describe regulatory approaches that rely on financial incentives and disincentives to induce desired behavior by a regulated firm. Performancebased regulation pbr is an approach to utility regulation designed to strengthen utility performance incentives. Public utilities maintenance software public works cmms. Performancebased regulation for distribution utilities november 2000 introduction and summary this report provides regulators and their staffs with practical advice on performancebased regulation pbr for distribution utilities. These contracts include timebound performance targets against which the performance of the operator is measured. Although the electric utility industry has considerable experience with incentive. Guidelines for performancebased contracts between water.
Performancebased regulation pbr is a rate setting mechanism that, for a set period of time, breaks the direct link between the costs of a utility and the rates charged to customers also referred to as incentive regulation ir or formulabased ratemaking fbr adjusts rates on annual basis through indexing or. Pbr is the industry term for forms of regulation that increase financial incentives for performance relative to traditional costofservicehateofreturn cosror regulation. Perhaps the most successful performancebased program in california is a gas utility mechanism that allows gas utilities to retain part of the proceeds from. Performancebased regulation pbr promotes a shift from cost of service to value of service and provides a way for utilities, customers, and broader society to. Optional performancebased ratemaking for natural gas utilities commission rulemaking. New utility business models including performance based regulation description. Jul 15, 2019 successful performance based regulation, according to the regulatory assistance project, requires clear measurement methods and an approach that monitors outcomes, not just input metrics such as spending on wellintentioned programs. Utilities increasingly view the programs as critical for locking in more stable. A growing body of research has centered on theissue of the relationship between financial andenvironmental performance. Pbr stands for performance based ratemaking,6 a particular technique through which utility regulators set the rates which utilities may charge to their customers. How should we structure performancebased regulation of. Emphasizing utility performance to unleash power sector innovation, author logan, jeffrey s and zinaman, owen r and littell, david and kadoch, camille and baker, phil and bharvirkar, ranjit and dupuy, max and hausauer, brenda and linvill, carl and migdenostrander, janine and rosenow, jan. As one of the largest and most regulated industries, the energy sector has to employ compliance strategies that are robust as well as agile.
Electric utilities, author lowry, mark newton and makos, matt and deason, jeff and schwartz, lisa, abstractnote electric utilities today must contain costs at a time when many need to modernize aging systems and all face major changes in technologies, customer. Performance based ratemaking pbr is receiving increased attention by energy utilities and their regulators. First, the pbr regulator sets an initial price based on the utilitys observed and projected costs. Performancebased consumer law is more than a technocratic exercise. Performancebased regulation has emerged as a promising potential solution to. It does so by rewarding utilities for achieving welldefined outcomes performance metrics, as opposed to providing. If designed properly, performance based contracts can help lay the basis for the longterm sustainability of the utilities. Performancebased regulation pbr is a regulatory framework that attempts to align the behavior and financial interests of regulated utilities with public interest objectives and consumer benefits. Performancebased ratemaking pbr is receiving increased attention by energy utilities and their regulators. And in response to this change, regulators are carv. May 07, 2018 americas utility business model has changed. Although the electric utility industry has considerable experience with incentive mechanisms that target specific.
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