Electricity Markets

Mich. PSC report addresses performance-based regulation

The Michigan Public Service Commission recently released a study of performance-based regulation in which the commission says that “integrating forms of PBR into the existing cost-of-service regulatory model could help utilities and regulators adapt to potentially profound changes affecting the energy industry in the coming years.”

The PSC’s report was required by sweeping energy legislation that was signed into law in late 2016.

Several states, including Hawaii and Minnesota, are exploring PBR, a regulatory approach under which a utility’s rate of return depends on the utility meeting specific policy goals, such as service quality, reliability, power plant performance and innovation. PBR can also remove disincentives inherent in traditional regulation for non-capital solutions such as energy efficiency and customer-owned generation, the report said.

The PSC drafted its report after conducting a stakeholder process last year.

The report focuses on four key areas: ways to estimate a utility’s needed revenue; ways to increase the time between rate cases; options for setting incentives and penalties; and, profit-sharing provisions to spread efficiency gains between consumers and utility stockholders while reducing risks associated with innovation.

The PSC currently uses a cost-of-service regulatory approach that gives utilities incentives to build infrastructure to meet energy demand, according to the report.

“However, stagnant growth in energy demand has challenged the assumption that utility investment can be funded by anticipated future growth, causing rate cases to be filed more frequently,” the report said.

Michigan’s electric and natural gas utilities are spending about $3 billion a year to replace aging infrastructure, which led to an unprecedented 11 rates cases last year. “The frequency of these cases (and the time and cost involved for the commission, utilities, and stakeholders) has also led to questions about the traditional regulatory approach, and whether PBR could play a role in potential reforms,” the report said.

It is difficult to encourage innovation and operating efficiency within the traditional regulatory model, according to the report.

Besides looking at PBR in the United Kingdom and New York, the PSC studied potential approaches including: cost-of-service with targeted incentives; performance incentive mechanisms for demand response; shared-saving approaches; and, approaches to optimize overall capital expenditures and operating costs.

The commission said it intends to: (a) proceed through the use of 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.

The PSC has a well-established program to accelerate the replacement of aging natural gas main pipelines that could be expanded to address other infrastructure challenges in conjunction with additional performance metrics, the report said.

Also, the PSC has a new electric distribution planning initiative to increase transparency and stakeholder engagement on grid modernization goals, metrics and investment strategies that could provide a foundation for PBR, the report said.

“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,” the report noted.

The PSC said stakeholder involvement will be a critical element in any changes to the commission’s regulatory approach.

“Incorporation of a public process with stakeholders and utilities is important to the success of new and innovative programs,” the report said. “This is particularly the case as advanced technologies offer grid and customer values simultaneously, and the commission intends to keep all stakeholders engaged as it moves forward.”

The report is available here.

The Hawaii Public Utilities Commission on April 18 started a two-phase investigation into PBR, partly in response to the state’s focus on renewables and distributed resources.