DIGGING DEEPER INTO PERFORMANCE- BASED REGULATION

Transcription

1 DIGGING DEEPER INTO PERFORMANCE- BASED REGULATION SONIA AGGARWAL SEPTEMBER 2 3,

2 THE WAY WE MANAGE TODAY COST OF SERVICE REGULATION Utilities spend prudently to maintain the power system Utilities recover capital plus a return on equity This essentially incentivizes capital expenditures and sales volume a perfect structure for building out a growing power system to serve customers. 2

3 PRESSURES ON THE POWER SYSTEM Major drops in clean energy costs Demand response means our 100 million buildings could be batteries Aging infrastructure Extreme weather demands resilience Increasing competition post-restructuring New environmental regulations Flat demand 3

4 MODERN GOALS FOR THE GRID AFFORDABILITY RELIABILITY/RESILIENCE Bloomberg ENVIRONMENTAL PERFORMANCE 4

5 CAN COST OF SERVICE REGULATION MEET THESE GOALS? This calls for a drink. Is PBR a solution? 5

6 PBR STARTS WITH STATE POLICY OUTCOMES, E.G.: Minimize system costs Deliver accurate bills Comply with 111(d) Ensure cost equity Respond to complaints Minimize siting impacts Minimize outages Access new services Fill in yours here! Then: Ties financial rewards to delivering those outcomes. Motivates long-term cost savings through productivity and cost-effective investments. 6

7 HOW DOES IT WORK? Policymakers Regulators Utilities Already a Outcomes standards driven industry Retail Level, e.g.: Reliable service Customer satisfaction Equity Innovative third-party services Wholesale Level, e.g.: Establish policy priorities Work with regulators Set quantitative Meet goals performance goals Receive rewards Establish reward & and/or penalties penalty structure System-wide least cost Resource diversity Effective facilitation of open access Reliability Innovation 7

8 PBR CHANGES THE CENTRAL QUESTION FROM: Did we pay the right amount for what we got? TO: Are we paying for what we want? Utility and Regulatory Models for the Modern Era by Ron Lehr 8

9 TWO EXAMPLES 9

10 PERFORMANCE-BASED COMPENSATION SHARED PROFITS: XCEL ENERGY COLORADO Xcel was producing more than the required renewable electricity under Colorado s RPS, but it could not sell credits. So, the Colorado PUC approved a program to share proceeds from REC sales between utility and customers. The result was $35 million for customers and $20 million for Xcel in the first 18 months of the program. 10

11 PERFORMANCE-BASED REGULATION NUCLEAR PERFORMANCE: THE WENDLING PLAN A nuclear facility was unable to produce power, and ongoing maintenance was costing customers. So, the PUC set up a program where the plant operator would make money if they could keep the capacity factor above 50%, or would pay penalties into a fund if they could not. The result was a decommissioning of the plant in favor of lower cost sources of generation. 11

12 NEXT STEPS FOR CONSIDERATION State Energy Advisors: Consider whether performance-based regulation would help achieve your state s energy policy goals. Open a discussion with regulators about updating utility incentives. If appropriate for your state, enact legislation calling for more performance-orientation in the power sector.. 12

13 NEXT STEPS FOR CONSIDERATION State regulators: Open an exploratory docket to determine what outcomes are most important to customers. Work with utilities to identify quantitative performance in those outcome categories, begin to track metrics and learn from them WITHOUT YET tying financial compensation. If your state uses IRPs, ask utilities to answer questions about fundamental outcomes and to consider scenarios that more directly deliver on those outcomes. If appropriate for your state, begin compensating utilities based on performance. 13

14 RESOURCES New York s Reforming the Energy Vision docket The U.K. s RIIO model The Western Interstate Energy Board s utility business model working group: Phase 1: New Regulatory Models gives examples of PBR in action and principles for design: Phase 2: forthcoming work (est. December) on useful metrics More resources available at 14

15 W W W. E N E R G Y I N N O VAT I O N. O R G W W W. A M E R I C A S P O W E R P L A N. C O M THANK YOU SONIA AGGARWAL SONIA@ E N E R G YI N NO VAT I O N.ORG 15 T W I T T CLEAN T E C H S O NI A

16 BACKUP 16

17 PRINCIPLES FOR DESIGNING PERFORMANCE-BASED RATEMAKING 1) Define goals and outcomes. Then, set a quantitative standard for performance; include incentives for exceptional performance and penalties for missing the standard. 2) A clear methodology for measuring performance and a counterfactual should be defined at the outset of the program. Simply beginning to measure performance can reveal substantial opportunities for savings. 3) Shift an appropriate amount of performance risk to the utility, in exchange for longer-term regulatory certainty and perhaps incentive compensation. Reward entrepreneurialism. 4) Establish a long enough time horizon for the utility and third-parties to make investment decisions with certainty and innovate to meet performance targets. 17

18 PRINCIPLES FOR DESIGNING PERFORMANCE-BASED RATEMAKING 5) Revenue sharing can align utility performance with customer benefits. Structure programs so there is enough upside potential for the utility to drive innovation. 6) Build on an existing framework, but aim to find holistic solutions that go far enough to align incentives and simplify the regulatory process. 7) Single performance incentives can be designed to achieve multiple objectives. 8) Mid-course correction can be built in, but the need for any changes must be announced well in advance of implementation, in order to minimize uncertainty. 9) Engage with customers and other power sector participants early to find out which outcomes they care about. Both utilities and commissions can be proactive on this. 18