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Utility Dive: Performance-based regulation: How Minnesota is inching toward a new oversight model

Posted by Herman Trabish on Apr 24, 2018

Utility Dive observes that new insights could slow Minnesota’s cutting-edge move to a performance-based utility business model and reports on efforts to implement performance-based regulation as part of its e21 grid modernization initiative. 

Here are excerpts that include perspective from AEE’s Hannah Polikov:

Performance-based regulation needs more work before it is ready to effectively deal with the perverse incentive, according a stakeholder group studying cutting-edge utility oversight proposals in Minnesota.

A completely new performance-based regulatory approach may be less effective than innovative alternatives to the existing cost-of-service (COS) regulation, stakeholders told Utility Dive. 

The perverse incentive is the curse of traditional COS regulation. It rewards regulated utilities with a return on capital expenditures even if they are not the lowest cost approaches to resolving system needs. Performance-based regulation (PBR) substitutes performance incentives for returns on investments, freeing utilities to make choices that might better benefit ratepayers.

Using performance incentives that link earnings to how well a utility achieves policy goals was a “central recommendation” from a stakeholder process led by Minnesota’s e21 Initiative in December 2016. The e21 initiative includes Minnesota utilities as well as environmental and consumer advocates… 

Where PBR can work

Advanced Energy Economy Public Utility Commissions Program Manager Hannah Polikov said traditional COS regulation suits investments in generation or transmission and distribution system infrastructure. “But if the objective is to have customers use less energy by growing energy efficiency or DER, the incentive is not there.”

Done well, PBR provides incentives for that kind of designated outcome, but it is not a separate regulatory model, Polikov insisted. “It is a layer on top of the traditional cost of service model that adds carrots and sticks to get to policy objectives.” 

See the complete Utility Dive story here for a deep dive including Minn. AG's recommendations here.

Topics: AEE In The News