I recently began hearing the phrase “performance-based rate making”. I did some digging into what the phrase means and how it is being used in the electric industry.
Performance-based rate making generally means tying electric utility revenues and profits to specific goals of performance, rather than the traditional process that creates rates based on capital expenditures. The new ways customers are getting and using electricity, such as with renewable energy resources, is resulting in a change in business model from traditional rate making processes.
Implementation of Performance-Based Rate Making
Many states are considering implementing performance-based rate making, with some states much further into the process than others.
Each state can set its own goals based on the main concerns and priorities of its regulatory commission. These often will include factors such as environmental programs, quality of service provided to customers, efficiency and rate stability. Once goals are established, utilities will be measured on key metrics for each goal and earn financial rewards for exceeding goals and pay penalties for falling short.
Although performance-based rate making has been discussed for many years now, there are very few states which have implemented it. Hawaii seems to be the furthest along in the process. It is the only state that has set a deadline for financial incentives and penalties for utility performance. Hawaii will create a performance-based rate structure that ties utility revenue to results of performance metrics by the year 2020, according to the 2018 Ratepayer Protection Act. Illinois, New York and Rhode Island all have also moved forward with various performance-based rate programs for utilities.
Performance-based rate programs large scale results are not yet available. These programs have not been around long enough to determine how well they work. However, performance-based rate making is expected to continue to expand as traditional utility revenues continue to be affected by changes in the industry like generation distribution and energy storage.