Performance Based Ratemaking Around the US

The traditional ratemaking model, where a utility profits by selling electricity and earning a rate of return on capital investments, promotes consumption of energy as well as massive capital investments. While this approach was useful as the country was rapidly expanding and becoming more industrious, recent developments in technology and shifts in state policies have made the traditional model less practicable.

One alternative form of utility ratemaking that regulators around the country have considered is performance-based ratemaking, or PBR. PBR incentivizes utilities by rewarding them for meeting goals like providing rate stability, reliability, third party interconnection, or even procurement of renewable resources.

In 2017, the Oregon Legislature passed SB 978. The bill required the Oregon Public Utility Commission (PUC) to investigate how policy drivers in the electricity sector might impact the existing regulatory system, and consider changes to the regulatory system and incentives. The PUC responded by launching a performance-based regulation process to align utility incentives with customer objectives that include addressing climate change, improving affordability, and environmental justice efforts. In thinking about how PBR will be implemented in Oregon it can be informative to examine how other states around the country are employing this ratemaking technique.

Illinois was the first state to begin to implement the PBR model. In 2011, the state legislature passed the Energy Infrastructure Modernization Act. The law requires utilities in the state to either meet or exceed various performance-based goals that include four reliability goals, four customer benefit goals, and one diversity related performance goal. The results have been remarkably positive for customers and for Illinois’ overarching energy system. Customer bills have remained stable for ten years and the number of outages has decreased by nearly 50 percent. Additionally, the utility rate proceedings are generally progressing uncontested which has driven down the price for customers.

New York joined Illinois in its development of a PBR system called Reforming the Energy Vision in 2015. The program is incentivizing the installation of distributed energy generation, increases in overall system efficiency, and engagement of the private sector to install renewable resources. One unique component of the New York system is that utilities are allowed to earn revenue for capital investments in new technologies. The system will also encourage utilities to use third parties to improve the efficiency, flexibility, and resilience of the grid. New York designed its cutting-edge program to be very broad, which could provide some insight into the potential for PBR. The New York system does not prioritize keeping customer rates low, so these increased incentives and revenue on capital investments in new tech have the potential to drive up the everyday customer’s costs.

Hawaii provides an example of the potential negative impacts of advancing state policies without simultaneously protecting customers. In 2015, Hawaii passed a renewable portfolio standard of 100 percent by 2045; at the same time the legislature also directed the state PUC to encourage investor-owned-utilities to develop and invest in renewable projects. Then in 2018, in response to the lack of customer protections, the legislature passed another law, the Ratepayer Protection Act, which required the PUC to implement PBR by 2020. Since then the PUC staff have issued a PBR proposal with three regulatory goals focused on: customer experience, utility performance, and societal outcomes. If adopted by the PUC, Hawaii will have a ratemaking system that aims to protect customers from costs, but also allows the utilities to aggressively pursue compliance with a 100 percent renewable portfolio standard. If the model in Hawaii is implemented it could provide an excellent model for Oregon where climate change and affordability are among the top priorities.

Rhode Island has launched a program to transform the power sector within the state. The program is meant to control long-term costs of the energy system, provide customers with more energy choices, and build a responsive grid to integrate clean energy sources. The state has since created a roadmap for the implementation of PBR that includes a multi-year rate plan and budget with an accompanying rate cap. It would also provide increased incentives for improvements in energy efficiency, deployment of distributed energy resources, and more responsive improvements to customer support. The structure of this system prioritizes keeping customers’ rates low in the long term. While the effects on rates in Rhode Island have not yet been reported, the prospects are interesting, perhaps the utility of the near future could be one that everyday citizens interact with in order to lower their individual bills.

At CUB, as always, we look forward to doing our part to advocate for policies that protect the environment and Oregon ratepayers’ wallets.

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