Earlier this month, the Lawrence Berkeley National Laboratory issued a report entitled State Performance-Based Regulation Using Multiyear Rate Plans for U.S. Electric Utilities. This report provides in-depth analysis of multiyear rate plans (MRPs). MRPs are a particular type of performance-based regulation, a broad approach to regulation that emphasizes incentives. MRPs typically include three key characteristics: (1) a rate case moratorium that reduces the frequency of rate cases to once every four or five years, (2) an attrition relief mechanism that permits rates to increase during the years between rate cases, and (3) various performance incentives for service quality. While MRPs are not used in most states, the report analyzes case studies from Maine, California, New York, and Iowa, as well as from Canada and Great Britain.
According to the report, MRPs have several advantages over traditional cost of service regulation in addressing contemporary challenges. Well-designed MRPs can strengthen performance incentives and increase operating flexibilities during the years between rate cases, allowing utilities to more easily adopt new technologies. In addition, MRPs can include incentive provisions that encourage utilities to facilitate demand-side management and distributed energy resources. These consumer-side programs may also benefit from the decoupling of utilities’ revenue and costs under MRPs, which reduces utilities’ incentives to maximize total sales between rate cases. Furthermore, since MRPs require rate cases only every four or five years, they can free up regulatory resources for other uses. However, the report also notes that MRPs can be complicated to initially implement and may require significant changes to states’ regulatory systems.
The report concludes that MRPs can improve the efficiency of regulation and utility cost performance. As a result, the report predicts that the use of MRPs will increase over time and recommends that state utility regulators, consumer groups, and utility managers consider MRPs when undertaking grid modernization efforts.
