Brattle Principal William Zarakas has authored an article published in the December 2017 issue of Public Utilities Fortnightly (PUF) that discusses how the current menu of performance based regulation (PBR) mechanisms may need to be modified if they are to be used as tools to move utilities into a “Utility of the Future” (UoF) environment.
PBR generally refers to a regulatory mechanism or approach that induces utilities to improve their performance through the application of financial incentives (i.e., rewards and penalties). It is well understood that effective PBRs need to be aligned with policy goals, and the scope of policy goals has changed considerably in recent years. Policymakers and regulators are increasingly looking for utilities to take on new initiatives and directions that move the industry in a new and disruptive direction, which raises the question as to whether the PBR mechanisms that are prevalent today are able up to the task of motivating utilities to lead the way into this new environment.
The article reflects how PBR mechanisms currently in place – such as multiyear rate plans (MRPs) and performance incentive mechanisms (PIMs) – have been effective in addressing cost control and operational performance goals, but do not necessarily provide sufficient incentives to motivate utilities to act in a way to advance new regulatory policy goals, such as modernizing the grid, integrating distributed energy resources (DERs), and developing platforms that enable more far-reaching grid accessibility. Mr. Zarakas suggests that changing the PBR framework to take account of policy outcomes is essential to enabling realization of these policy goals and ensuring that PBR remains relevant.
The article, “A New Face for PBR: Aligning Incentives in the Electric Utility Ecosystem,” is available on the PUF website.