What is Performance-Based Rate Making?

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 performance goals 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, are resulting in a change in business model from traditional rate making processes.

 

Why Are States Moving to Performance-Based Rate Making? 

The adoption of performance-based rate making is rapidly rising in the United States. Today, more than a dozen states and counting have enacted legislative developments that promote PBR and link performance metrics with financial prospects. PBR helps states grow their energy-efficiency initiatives and improve their energy storage techniques.

The move toward PBR for utilities indicates a growing belief that there should be no link between revenue and investment in any utility-oriented business model. This step also helps utility companies grapple with the changing nature of American electric grids nationwide. Four unique factors are driving utility PBR adoption forward:

  1. Statewide legislative promotions/mandates
  2. Regulatory commissions and central stakeholders
  3. Administrative policy and renewable energy commitment
  4. Utility goals such as becoming carbon-free

 

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, very few states 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, along with its initiative to reach 100% renewable energy statewide.

In June, the Hawaii Public Utilities Commission (PUC) issued a decision and order approving a portfolio of new Performance Incentive Mechanisms (“PIMs”), Scorecards, and Reported Metrics. This follows their decision back in May of 2021 to approve the final details of the new performance mechanisms for the PBR Framework. 

Illinois, New York and Rhode Island all have also moved forward with various performance-based rate programs for utilities.

 

What Are the Pros and Cons of PBR?

With all the growing support behind PBR and PBR-oriented initiatives, adopting a PBR system comes with unique pros, including:

  • Easily quantifiable metrics and scorecards: PBRs are easily measurable and can be visualized with devices like scorecards to compare historic levels.
  • Increased investment opportunity: Since the demand for power has fallen dramatically in the past year, PBRs increase this opportunity for growth.
  • Increased conservation efforts: PBR has been used as an opportunity to aggressively pursue renewable energy and prioritize climate change.

 

Cons

Despite the many pros, there are some disadvantages. Some cons of performance-based regulation include the following:

  • Increased customer cost: In certain states, PBR systems have allowed utility companies to aggressively pursue renewable energy compliance. However, this can incur high financial costs for their customers.
  • High compliance costs: Some states have begun establishing high compliance fees alongside PBR initiatives and incentives. 

 

Results?

Large-scale results from performance-based rate programs 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.

 

RateAcuity and PBR

At RateAcuity, our APIs and web portals give you the insight necessary to adapt to growing PBR trends and analyze your current and historic rates. With this information constantly at your fingertips, you’ll always be compliant with new regulations and get insights into energy changes in real time. From standardized Excel reports and historical tracking to self-service searching for electric rate data, RateAcuity lets you take full advantage of your data and stay ahead of the PBR curve. 

 

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