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Upheaval in utility regulation emerging nationally as Hawaii proves a performance-based approach


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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.

PBR emerging

Hawaii’s 2018 Senate Bill 2939 led to today’s expanding PBR focus across the U.S., a March 30 Esource survey of state PBR work reported. Nevada’s limited SB 300 and Connecticut’s more specific House Bill 7006 followed in 2019. In 2021, North Carolina passed HB 951, which directed regulators to develop a PBR program, and Illinois passed SB 2408, beginning a comprehensive reform process.

Colorado, Michigan, Massachusetts, D.C., New Hampshire, Maine, Arizona, Washington, New York and Minnesota also have ongoing legislative and/or regulatory PBR initiatives, according to North Carolina Clean Energy Technology Center’s Q1 2022 Grid Modernization policy update.

State versions of PBR vary with how and when they apply core PBR components like performance incentive mechanisms, or PIMs, multiyear rate plans, or MYRPs, and revenue or profit adjustments, the Esource paper said.

PIMs set targets, metrics and financial incentives and precisely define goals ranging from reliability and safety to decarbonization, electrification and peak demand reductions, Esource said. PIMs must be specific to ensure utilities are rewarded for their achievements without over- or under-compensating them.

MYRPs extend time between rate cases, which gives utilities the opportunity to improve performance and the flexibility to test innovations, Esource said. MYRPs also provide time for the PIMs that drive new technologies to demonstrate their revenue impacts, PBR consultant Rabago recently testified in Illinois.

Long-used “decoupling” adjustments allow utilities to keep revenues stable while meeting energy efficiency goals that reduce kWh sales, Esource said. But newer PBR revenue and profit adjustments may provide “rate-of-return adders or shared-savings mechanisms” that return savings from utility innovations to customers, it added.

COS rewards utilities for capital investments and gives them no incentive to take advantage of other opportunities, said Advanced Energy Economy Managing Director Ryan Katofsky. But “Hawaii’s success shows PBR can recognize the value of new low-cost technologies to improve utility service or meet societal goals.”

Permission granted by Esource


Models of success

All U.S. PBR efforts remain nascent, but Hawaii’s December 2020 Hawaii Public Utilities Commission order makes it a pioneer, said Uplight Director, Market Development and Regulatory Innovation, Dan Cross-Call, a former principal at RMI who oversaw the stakeholder engagement process in Hawaii.

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