The Alphabet of PBR in Electric Power: Why X Does Not Tell the Whole Story

Categories: Performance-Based Ratemaking

September 22, 2017 - Mark Meitzen

Phil Schoech

Mark Meitzen

Mark Meitzen and Phil Schoech teamed with Dennis Weisman, Professor Emeritus at Kansas State University, to write a forthcoming piece for The Electricity Journal, “The Alphabet of PBR in Electric Power: Why X Does Not Tell the Whole Story.” The article grew out of their experiences with incentive regulation across numerous industries since the late 1980s, including recent electric distribution incentive regulation proceedings.

The authors examine the disparate performance-based ratemaking (PBR) plans, also known as incentive regulation plans, adopted in the electricity and telecommunications industries. While adoption of PBR in the electric distribution industry has been sporadic, the telecommunications industry experienced widespread adoption of incentive regulation. As the literature finds that PBR and, specifically, price-cap regulation is superior to traditional cost-of-service regulation, the explanation for these differences may be found in the implementation of PBR. The combination of institutional and technological factors that precipitated the rapid embrace of incentive regulation in telecommunications probably set unreasonable expectations for PBR in electricity distribution. Whereas price-cap regulation in telecommunications delivered real price reductions over time, PBR may only be able to promise electricity consumers a slower rate of price growth. This practical reality makes the case for PBR more challenging to establish in electricity distribution than telecommunications.

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