August 4, 2017 - 10:00am
Electric utilities today must contain costs at a time when many need to modernize aging systems and all face major changes in technologies, customer preferences and competitive pressures.
Most U.S. electric utility facilities are investor-owned, subject to retail rate and service regulation by state public utility commissions. Regulatory systems under which these utilities operate affect their performance and ability to meet these challenges. In this business environment, multiyear rate plans have some advantages over traditional rate regulation.
Berkeley Lab's new report, State Performance-Based Regulation Using Multiyear Rate Plans for U.S. Electric Utilities, focuses on key design issues and provides case studies of the multiyear rate plan approach, applicable to both vertically integrated and restructured states. Mark Newton Lowry and Matt Makos of Pacific Energy Group Research and Jeff Deason of Berkeley Lab authored the report; Lisa Schwartz, Berkeley Lab, was project manager and technical editor.
The authors will present a free one-hour webinar on the report on August 4, 2017 10:00 AM-11:00 AM Pacific, (1:00 PM- 2:00 PM Eastern). Register here.
The report is aimed primarily at state utility regulators and stakeholders in the state regulatory process. The multiyear rate approach also provides ideas on how to streamline oversight of public power utilities and rural electric cooperatives for their governing boards.
Two key provisions of multiyear rate plans strengthen cost containment incentives and streamline regulation:
- Reducing frequency of rate cases, typically to every four or five years
- Using an attrition relief mechanism to escalate rates or revenue between rate cases to address cost pressures such as inflation and growth in number of customers, independently of the utility's own cost
Better utility performance can be achieved under well-designed multiyear rate plans while achieving lower regulatory costs. Benefits can be shared between utilities and their customers. But plans can be complex and involve significant changes in the regulatory system. Designing plans that stimulate utility performance without undue risk and share benefits fairly can be challenging.
The Berkeley Lab report discusses the rationale for multiyear rate plans and their usefulness under modern business conditions. It then explains critical plan design issues and challenges and presents results from numerical research that considers the extra incentive power achieved under different plan provisions. Next, the report presents several case studies of utilities that have operated under formal multiyear rate plans or, for various reasons, have stayed out of rate cases for more than a decade. These studies consider the effect of multiyear rate plans and rate case frequency on utility cost, reliability and other performance dimensions.
About the Authors
Mark Newton Lowry is President of Pacific Economics Group (PEG) Research LLC. He has been active in the field of performance-based regulation since the 1990s, doing research, consultation and expert witness testimony on multiyear rate plans, productivity, benchmarking and revenue decoupling. A former Pennsylvania State University energy economics professor, he holds a Ph.D. in applied economics from the University of Wisconsin.
Matt Makos is a Consultant II at PEG Research LLC. Over the past 10 years he has played a leading role in the gathering, appraisal and documentation of precedents for performance-based regulation and other alternatives to traditional utility regulation. He holds a bachelor's degree in business administration from the University of Wisconsin.
Jeff Deason is a Program Manager in the Electricity Markets and Policy Group at Berkeley Lab. He focuses on energy efficiency research and technical assistance projects in the areas of policy, program design, implementation and evaluation. He is in the final stages of a Ph.D. program in public policy at University of California, Berkeley, where he completed degrees in resource economics and behavioral economics.