(R)Evolution – PBR: Your Ticket to Ride May 14, 2020 | By Janet Gail Besser You say you want an evolution. Performance Based Regulation (PBR) may be your ticket to ride. The electricity system is changing rapidly in response to advancing technology, increasing customer expectations and shifting public policy. These developments are challenging the existing regulatory framework to keep pace and to manage new risks and uncertainties. What’s a regulator to do? Some state commissions envision a new industry structure and role for distribution companies. New York State’s Reforming the Energy Vision (REV) may be the most visible example. Other states, for example, Hawaii, are grappling with urgent needs to accommodate increasing amounts of distributed energy resources while maintaining system reliability. Both of these states are embracing structural and regulatory change at the same time. Altering the utilities’ role requires changes to their business models and changes to the regulatory framework that rewards or penalizes them for their actions. Yet more states may be similar to Minnesota, still largely vertically integrated and/or grounded in traditional cost-of-service regulation (COSR), but looking forward to inexorable changes. Despite different starting places, many states are exploring the same path forward: Performance Based Regulation – a regulatory approach or framework focused more on outputs, or what customers want, than inputs, or what utilities spend to deliver it. Plenty of papers exist about PBR, and what it can do to align utility, customer, and societal interests towards building the electricity system of the future. But, regulators need a map or path to get there from where they are now. Looking to the future The Renovate Initiative, convened by SEPA to spur the evolution of state regulatory processes and practices, recently released a three-part Best Regulatory Practices “Toolkit” Series on PBR to provide that map. It describes Minnesota’s experience with PBR and Performance Incentive Mechanisms (PIMs) over the last several years. The series highlights lessons learned and steps that other states can implement — regardless of their structure, regulatory regime or DER adoption rates. Minnesota’s deliberate, measured and comprehensive approach to regulatory reform offers guidance and best practices for other states considering reforms. What are key elements of its success? Act sooner rather than later. Key players in Minnesota – regulators, legislators, utilities and other stakeholders – recognized that industry change was “inexorable” and acted early to reform regulation before the situation became urgent. Engage stakeholders early and often. A shared understanding of conditions and the challenges facing the electricity system was an essential foundation for reaching agreement on the shared objectives – an efficient, fair and transparent regulatory framework. Using an independent facilitator with industry expertise laid the groundwork for subsequent regulatory proceedings, and regular solicitation of input from stakeholders throughout the process was important to maintain their support and keep reform on track. Slow and steady wins the race. Minnesota built on extensive regulatory precedent for performance metrics (safety and reliability), incentives (energy efficiency) and cost recovery (existing rate mechanisms) to make progress toward comprehensive reform. Taking a steady, measured approach facilitated stakeholder education and buy-in, which also contributed to needed legislative support. Other key factors included flexibility in process and procedure to bring stakeholders along, and identifying the boundaries for the scope of generic or policy setting proceedings versus specific utility rate cases. Minnesota’s regulators, legislators and stakeholders kept their eyes on the prize – getting out in front of the industry changes they see coming. They built on their existing regulatory foundation, making incremental changes to modernize the framework so that utilities and solution providers can make the most of the capabilities of new technologies and approaches to meet the demands of customers today and in the future. A Three-Stage Path to PBR As more cities, states, and utilities commit to 100% clean energy targets and carbon reduction, Minnesota’s PBR evolution can offer guidance and best practices — mapping a smart path to the future by evolving the regulatory framework to enable innovation and the scalable deployment of new technologies and operating models. Utilities can then meet customer needs and increasing expectations while continuing to provide all with clean, affordable, safe and reliable electric service. Other States to Watch Sample PBR-related legislation Colorado: SB236 Nevada: SB300 Pennsylvania: HB 1782 Washington: SB 5116 Regulatory Action District of Columbia: FC1156 The Application of the Potomac Electric Power Company Authority to Implement a Multiyear Rate Plan for Electric Distribution Service in the District of Columbia. On May 30, 2019, Pepco filed an Application (FC1156) for approval to increase rates for its electric distribution service in the District of Columbia (“District”) (“Application”) under two different rate-setting methodologies as allowed by directives in Order No. 18846: (1) a Multiyear Rate Plan (MRP) proposal with appropriate PIMs; and (2) a traditional cost-of-service plan. The three-year MRP proposed (2020 – 2022) includes a three-step rate adjustment, and five PIMs and one tracking metric. Massachusetts: Eversource MA DPU 17-05 – The Commonwealth of Massachusetts —— On November 30, 2017, the Massachusetts Department of Public Utilities (DPU) approved Eversource Energy’s PBR proposal. Structured as a revenue cap with annual adjustments based on inflation, productivity, consumer dividend and exogenous factors ( CPI-X+Z), the order set rates for five years. While the company did not propose any performance metrics as part of the PBR, the DPU identified three areas for “reporting only” metrics: customer service / engagement, system peak reductions, and strategic planning for climate adaptation. National Grid MA DPU 18-150 – The Commonwealth of Massachusetts —— On September 30, 2019, the DPU approved National Grid’s PBR proposal. Similarly structured as a revenue cap with annual adjustments based on inflation, productivity, consumer dividend and exogenous factors, the order set rates for five years. National Grid proposed four performance incentive mechanisms and three scorecard metrics. The DPU approved two of the scorecard metrics, noting others were being addressed in separate proceedings. Michigan: In 2018, the Michigan PSC, under direction from the Michigan Legislature and Governor, undertook a comprehensive examination of PBR (“Report on the Study of PBR”). The Commission engaged stakeholders and evaluated four specific factors: (1) methods for estimating revenue needed, (2) methods to increase the time between rate cases, (3) options for establishing incentives and penalties, and (4) profit-sharing provisions that can spread efficiency gains among consumers and utility stockholders and can reduce the degree of downside risk associated with innovation. The recommendations from the report included: (a) leverage pilot programs to evaluate the feasibility of different approaches, (b) integrate PBR with other energy planning and infrastructure programs, and (c) continue to keep stakeholders involved. Additionally, in Case No. U-20147 on electric distribution planning, the Commission intends to evaluate the inclusion of PBR metrics in these programs and also review other programs that may prove fruitful for the use of PBR. In April 2020, a PSC report on findings from its distribution planning stakeholder sessions, noting alternative regulatory approaches, was filed (Michigan PowerGrid Electric Distribution Planning Stakeholder Process Report). Rhode Island: National Grid Docket 4770/4780 STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS PUBLIC UTILITIES COMMISSION IN RE: THE NARRAGANSETT ELECTRIC COMPANY : d/b/a NA On May 5, 2020, the Rhode Island PUC issued the written order in docket 4770/4780, codifying the verbal orders issued in August and September 2018, establishing a multi-year rate plan with a term of 3 years; approving a modified System Efficiency:Annual MW Capacity Savings Performance Incentive Mechanism (PIM) and six other proposed “scorecard” metrics with no financial impacts. Share Share on TwitterShare on FacebookShare on LinkedIn About the Author Janet Gail Besser Managing Director As Managing Director, Janet Gail Besser oversees strategy for the SEPA Pathways – Utility Business Models, Regulatory Innovation, Grid Integration and Transportation Electrification – and leads content development and execution for Regulatory Innovation. She brings to this role broad energy industry experience as a regulator, clean energy business association leader, utility executive, developer, consultant, and consumer advocate. Previously, she was Executive Vice President of the Northeast Clean Energy Council (NECEC), Vice President, Regulatory Strategy and Policy at National Grid, Chair and Commissioner of the Massachusetts Department of Public Utilities, where she led electric industry restructuring, and an executive and expert consultant at Analysis Group and Lexecon. She also held senior staff roles at the Massachusetts Energy Office and New Hampshire Public Utilities Commission, served as policy director for a DC-based national independent power association, and began her career as a small hydro developer and low-income consumer advocate. Janet is a nationally recognized expert on a wide range of energy policy issues with deep relationships across the industry. She earned a Master in Public Policy degree from the John F. Kennedy School of Government, Harvard University and a B.A., magna cum laude, from Williams College.