1 PERFORMANCE- BASED REGULATION Sonia Aggarwal November 10, 2015.
Transcript of 1 PERFORMANCE- BASED REGULATION Sonia Aggarwal November 10, 2015.
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PERFORMANCE-BASED REGULATIONSonia AggarwalNovember 10, 2015
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2WWW.AMERICASPOWERPLAN.COM
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1.WHY
2.HOW
3.EXAMPLES
4.NEXT STEPS
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THE POWER SECTOR HAS EVOLVED
Old Goals: Meet growing demand
Build new infrastructure
Build to deliver universal service
Affordability, Reliability, Safety
Old Options: Centralized power plants
Transmission lines
Distribution system
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THE POWER SECTOR HAS EVOLVED
Old Goals: Meet growing demand
Build new infrastructure
Build to deliver universal service
Affordability, Reliability, Safety
Old Options: Centralized power plants
Transmission lines
Distribution system
New Goals: Customer satisfaction Build Maintain Reliability Resilience Clean power Affordability, Safety
New Options: All the old stuff, plus: Affordable distributed energy
resources (EE, DR, PV, EVs, etc.) Advanced IT
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COST OF SERVICE REGULATION
Utilities spend prudently to maintain and operate the power system
Utilities recover capital expenses plus a rate of return Operational expenses are recovered at no risk to the
utility
This incents capital investments and sales volume A good structure for 20th century goals
(meet growing demand, build new infrastructure, build universal service)
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MODERN GOALS FOR THE POWER SYSTEM
Affordable, Safe
Resilient
Clean
Customer-oriented
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Customer-oriented
ALIGN FINANCIAL INCENTIVES OF:
Utilities
Customers
Independent Power Producers
3rd party service providers $Affordable, Safe
Resilient
Clean
WITH THESE GOALS:
PERFORMANCE-BASED REGULATION CAN ALIGN FINANCIAL INCENTIVES
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PERFORMANCE-BASED REGULATIONFOR THE INVESTOR-OWNED RESIDUAL MONOPOLY
Works in both vertically-
integrated & restructured
markets!
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From: “Did we pay the right amount for
what we got?”
To: “Are we paying the right amount for what we want?”
Utility and Regulatory Models for the Modern Era
by Ron Lehr
PBR changes the central question…
PERFORMANCE-BASED REGULATION
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1.WHY
2.HOW
3.EXAMPLES
4.NEXT STEPS
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COST OF SERVICE REGULATION, SIMPLIFIED
Revenue = Operating Costs + (Capital Costs) *
ROR…As utility investment increases
Revenue increases…
(Rate of Return)
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Revenue = Operating Costs + (Capital Costs) *
ROR
ELEMENTS OF COST OF SERVICE EQUATION
Often a pass-through
Reviewed by the Commission for prudence and public interest
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Regulators
Set quantitative performance goals
Establish reward & penalty structure
Utilities
Meet goals
Receive rewards and/or penalties
• Equity• Customer satisfaction• Affordable bills• Reliable service
• System-wide least cost
• Effective facilitation of open access
• Reliability• Resource diversity• Innovation
Retail Level, e.g.:
Wholesale Level, e.g.:
OutcomesPolicymakers
Establish policy priorities
Work with regulators
POLICY SOLUTIONPERFORMANCE-BASED REGULATION Already
a standards driven industry
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OPERATIONAL COST SAVINGSESTABLISH METRICS, AND TRACK THEM
PacifiCorp cut costs in half in 15 months, simply by developing repeatable metrics, and beginning to measure and track operational expenses consistently.
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Revenue = Operating Costs + (Capital Costs) *
ROR
PERFORMANCE-BASED REGULATION, SIMPLIFIED
± Performance
…As utility investment increasesperformance improves
Closer to the cost of capital
Revenue increases…
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MOVING FROM COST OF SERVICE TO PERFORMANCE-BASED REGULATION
Opex (including
depreciation & taxes)
Opex (including
depreciation & taxes)
ROR
ROR
Reven
ue
Incentives or penalties for
value-creating activities*
ILLUSTRATIVE
Traditional Model(r>k); value derived from all investment
activities
Performance Value Model
value derived from performance
*Overall costs may actually decrease; but potential returns to shareholders may grow commensurate with the additional risk shifted to utilities
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1.WHY
2.HOW
3.EXAMPLES
4.NEXT STEPS
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EXAMPLE 1 OF 2: AFFORDABILITY=PROFIT
ConEd proposed to replace a $1 billion substation upgrade with $200 million demand management solutions ($800 million savings)
Commission offered the regulated rate of return on operational expenditures tied to performance
Additional 100 basis points (~$2 million) could be earned for excellent performance in three categories:
Energy Savings: Exceeding the peak reduction target (45 points)
Affordability: $/MW less than traditional investment solution (30 points)
Market animation: Increasing the diversity of DER in the marketplace (25 points)
Brooklyn-Queens Demand Management Project
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EXAMPLE 2 OF 2: DRIVING PERFORMANCE
3% of total utility revenue at stake
Penalties and rewards offered
6 primary output categories tied to revenue customer satisfaction, reliability and availability,
safe network services, connection terms, environmental impact, social obligations
8 years to adapt and perform, opp to review at year 4
Incentive delivery: ROE adjustments applied to cap and op expenditures
United Kingdom “RIIO” Model
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1.WHY
2.HOW
3.EXAMPLES
4.NEXT STEPS
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NEXT STEPS TO CONSIDER
1. Get stakeholders together and agree on top goals for your state’s power sector. What value can utilities deliver to citizens and customers?
2. Identify appropriate quantitative performance metrics under each goal. Work with the Commission to establish a transparent methodology for calculating performance on each metric.
3. Begin to measure and track performance. Support pilots.
4. Grow the share of utility revenue tied to performance once the metrics and methodologies are well-understood.
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THANK YOU
@USPOWERPLAN
@ENERGYINNOVLLC
@CLEANTECHSONIA
WWW.AMERICASPOWERPLAN.COM
WWW.ENERGYINNOVATION.ORG
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1. Work with stakeholders to clearly define goals and outcomes in quantitative terms.
2. Include incentives for exceptional performance and penalties for missing the standard.
3. Use a transparent and consistent methodology for measuring performance. Define it clearly at the outset of the program.
4. Shift an appropriate amount of performance risk to the utility, in exchange for longer-term regulatory certainty and the opportunity to earn incentive compensation. Reward entrepreneurialism.
PRINCIPLES FOR DESIGNING PERFORMANCE-BASED REGULATION
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PRINCIPLES FOR DESIGNING PERFORMANCE-BASED REGULATION
5. Establish a long enough time horizon for the utility and third-parties to make investment decisions with certainty, and to innovate to meet performance targets.
6. Consider revenue sharing to align utility performance with customer benefits. Customer savings should be compatible with utility earnings.
7. Build on the existing framework, but look for holistic solutions that go far enough to truly align incentives and simplify the regulatory process.
8. Consider provisions for mid-course correction—any changes should be announced well in advance of implementation, to minimize uncertainty.
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DELIVERING THE INCENTIVE
* Shares may change over time
ROE adjustments: Basis point adjustments applying to the whole ratebase
e.g. IL, UK Incentive ROE for projects that meet performance criteria
e.g. CA: nuclear performance
“Direct incentives” Shared savings / shared profits*
e.g. CO: Xcel off-system sales Shareholder incentive mechanisms
e.g. CA: efficiency performance
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ROE adjustments: Basis point adjustments applying to the whole ratebase
e.g. IL, UK Incentive ROE for projects that meet performance criteria
e.g. NY – Brooklyn Queens Demand Management Project
“Direct incentives” Shared savings / shared profits*
e.g. HI: shared fuel savings Shareholder incentive mechanisms
e.g. CA: efficiency performance
DELIVERING THE INCENTIVE
* Shares may change over time
PREFERRE
D