Is Performance-Based Regulation or PBR the Future for Electric Utilities?
The momentum is growing when it comes to the adoption of performance-based regulation (PBR) in the electric utility industry. In fact, in Dec. 2019, Hawaiian Electric (HECO) announced that it will become the first investor-owned electric utility in the U.S. to move away from cost-of-service regulation and dive head-first into the wonderful world of performance-based regulation. But what exactly does this trend mean?
Performance-Based Regulation (PBR) Vs. Cost-of-Service Regulation
Historically, electric utilities earn profits by applying for rate increases that recover the cost of their infrastructure investment activities, with a percentage added to the top line that accounts for the company’s profit margin. The difference between this traditional approach and PBR is that the latter rewards utilities based on the value provided to customers, rather than the cost of maintaining or improving the infrastructure.
That being said, what exactly does it mean to add value for customers? Well, it can mean many things that involve the achievement of public policy objectives or helping customers save money, with some of the more obvious examples being:
- Introducing and integrating more renewable energy sources into the grid
- Improving the integration of distributed energy resources
- Accelerating advanced metering infrastructure (AMI or so-called smart meters)
- Offering more options around energy efficiency
- Improving overall reliability
Over the last 5 years, PBS has been considered in 19 states and the District of Columbia. Therefore, it does not seem like this trend is going away any time soon. It simply represents a new paradigm in the industry that is necessary due to the evolution of the grid. Check out the details of the Hawaiian Electric model for a great example of how this might play out.
I realize that many of you are probably grimacing at the prospect of upending your entire business model, but the winds of change are inevitable. The hope here is that the increasing use of performance-based regulation will positively impact outage frequency and restoration speed. Time will tell.
