Next-Generation Performance-Based Regulation: Emphasizing Utility Performance to Unleash Power Sector Innovation

Performance-based regulation (PBR) enables regulators to reform hundred-year-old regulatory structures to unleash innovations within 21st century power systems. An old regulatory paradigm built to ensure safe and reliable electricity at reasonable prices from capital-intensive electricity monopolies is now adjusting to a new century of disruptive technological advances that change the way utilities make money and what value customers expect from their own electricity company. Advanced technologies are driving change in power sectors around the globe. Innovative technologies are transforming the way electricity is generated, delivered, and consumed. These emerging technology drivers include renewable generation, distributed energy resources such as distributed generation and energy storage, demand-side management measures such as demand-response, electric vehicles, and smart grid technologies and energy efficiency (EE). PBR enables regulators to recognize the value that electric utilities bring to customers by enabling these advanced technologies and integrating smart solutions into the utility grid and utility operations. These changes in the electric energy system and customer capacities means that there is an increasing interest in motivating regulated entities in other areas beyond traditional cost-of-service performance regulation. This report addresses best practices gleaned from more than two decades of PBR in practice, and analyzes how those best practices and lessons can be used to design innovative PBR programs. Readers looking for an introduction to PBR may want to focus on Chapters 1-5. Chapters 6 and 7 contain more detail for those interested in the intricate workings of PBR or particularly innovative PBR.