The Nuts and Bolts of Performance-Based Regulation

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - The report discusses the need for reform in utility business models, emphasizing the shift from traditional cost-of-service regulation (COSR) to performance-based regulation (PBR) to align utility incentives with customer and societal interests [4][24][34] - PBR is presented as a collection of tools designed to improve utility performance and accountability, ultimately leading to a more affordable, reliable, and equitable energy grid [4][34] Summary by Sections Traditional Utility Regulation and the Need for Reform - The traditional COSR model has created perverse incentives that hinder the transition to affordable clean energy, such as gold plating and throughput incentives [24][25][34] - The report highlights the evolution of policy goals from expanding utility systems and encouraging energy usage to operating efficiently and fostering innovation [20][34] Performance-Based Regulation Tools - PBR tools include revenue decoupling, multi-year rate plans, capex-opex equalization, performance metrics, and performance incentive mechanisms [38][61][66] - Revenue decoupling aims to remove the throughput incentive and improve revenue stability for utilities [40][41] - Multi-year rate plans encourage cost containment and reduce the frequency of rate cases, although they can be complex [53][54] - Capex-opex equalization strategies are designed to mitigate capex bias and promote cost-effective operational solutions [61][62] Case Studies - The report includes real-world examples of how PBR has been implemented and its effects on utility performance and customer outcomes [6][34] Further Reading - The report suggests additional resources for readers interested in exploring PBR and its implications for the utility industry [6][34]