Performance-Based Regulation in a High Distributed Energy Resources Future

January 27, 2016

This report explores key elements and variations of such regulation and its advantages and disadvantages from the perspectives of utilities and customers. A unique feature of the report is its treatment of comprehensive, performance-based approaches to regulation in the context of a potential future with a high reliance on energy efficiency, peak load management, distributed generation and storage. It is the third report in Berkeley Lab's "Future Electric Utility Regulation" series.

Performance-based regulation (PBR) of utilities has been an important ratemaking option in numerous jurisdictions across the United States and other advanced industrialized countries. PBR aims to strengthen performance incentives, streamline regulation, and provide utilities with greater operating flexibility. Ideally, the utility and its customers share the benefits of better performance.

PBR is an alternative to traditional cost-of-service regulation (COSR), where utility revenues are based on investment and operating costs. This traditional approach can conflict with certain policy goals, since it provides strong incentives to increase electricity sales and utility rate base. COSR also may not provide utilities with appropriate financial incentives to address evolving electric industry challenges such as changing customer demands for electricity services, growth of distributed energy resources, and changing federal and state policies.