Performance-Based Regulation (PBR) refers to a regulatory approach aimed at enhancing the incentivization of utility performance. In essence, PBR is synonymous with incentive regulation. The prevalent forms of PBR include APMs which are known as award-penalty mechanisms and multiyear rate plans (MRPs). Both frameworks incorporate math formulas that can concurrently reduce regulatory costs while fostering improved performance. This represents a significant advancement in regulatory technology, holding substantial potential for enhancing regulatory effectiveness.
Why do You Need Performance Based Regulation (PBR)?
Performance-Based Regulation is designed to align investments of utility and actions with performance. This makes it essential for regulators to prioritize specific areas of performance based on the policy goals outlined by legislators in PBR. The importance of PBIs to solar energy is also substantial in managing the incentives since it helps in installing and maintaining solar power systems. To gain insights into the underlying policy motivations for PBR, an analysis was conducted on PBR legislation enacted in 7 states in 2018. The review revealed that states had identified up to 17 policy goals for PBR, particularly emphasizing reliability and cost control.
The prominence of these goals is not surprising, considering that all 7 states that implemented PBR legislation in the past four years have set targets of achieving zero or net-zero emissions within the electricity sector. Recent extreme temperature events leading to blackouts and price spikes in Texas, California, and the Midwest have underscored the criticality of grid reliability while imposing significant human and economic costs. Moreover, the COVID-19 pandemic and its economic repercussions have intensified the regulatory focus on costs and customer impacts. With its comprehensive framework and tools, PBR presents a viable approach for addressing many of these pressing challenges.
What are Examples of PBR?
Performance Based Regulation (PBR) principles can be implemented across various aspects of a utility’s operations, partially or comprehensively. Here are examples of how PBR can be applied to specific segments of the business:
1. Commodity Purchasing: A utility can introduce incentives tied to commodity purchasing, enabling them to enhance earnings by procuring supplies at prices below the market rate. Conversely, their earnings may decrease if the supply cost exceeds the market value.
2. Energy Efficiency Programs: A utility can bolster its earnings by successfully implementing energy efficiency initiatives. PBR can incentivize utilities to prioritize and execute such programs effectively, encouraging greater energy savings and customer benefits.
3. Non-Wires Alternatives (NWA): Utilities can identify cost-effective alternatives to traditional capital investments by contracting for services within an NWA mechanism. If savings are achieved through this approach, a portion can be utilized to augment earnings, incentivizing utilities to explore innovative and cost-saving solutions.
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