Performance-based rate structures impact spending

Charles W. Newton, Newton-Evans Research Company Inc.

In a 2002 study of all 50 state utility commissions and the D.C. commission, Newton-Evans Research Co. found that only 11 states had indicated development and use of any performance-based rates (PBR) that are currently in effect. States having any PBR guidelines by the second quarter of last year included: California, Colorado, Florida, Maine, Massachusetts, Mississippi, Missouri, New York, Oklahoma, Oregon, and Rhode Island. Two other states, Louisiana and Pennsylvania, were developing guidelines at the time of the study.

Among the group of 38 commissions that had reported no PBR activity in 2002, only two had reported PBR development was being proposed for the future.

Some officials reported that they did not make use of PBRs because “…the state was not deregulated.” However, several other officials from states that are not deregulated do in fact provide PBRs on a case-by-case basis, or upon request of a utility for a performance-based rate structure.

That’s “penalty” to you

A few state commission staff members indicated use of the term penalty-based rates as their interpretation of PBRs. Therefore, the Newton-Evans Research staff asked all commissions the question in addition to the first question, just in case some did use penalty-based rates. The survey found five states acknowledging use of such penalty-based rate structures, and three others developing guidelines. One state indicated possible consideration of penalty-based rates in the future.

indicated use of the term penalty-based rates as their interpretation of PBRs. Therefore, the Newton-Evans Research staff asked all commissions the question in addition to the first question, just in case some did use penalty-based rates. The survey found five states acknowledging use of such penalty-based rate structures, and three others developing guidelines. One state indicated possible consideration of penalty-based rates in the future.

Indiana’s commission staff indicated that penalty-based rate guidelines were being established for use on a case-by-case basis. Colorado’s commission reported that while not penalty-based, they do have a bill credit for quality of service issues that come into effect. Oregon indicated use of penalty-based rates implemented as part of performance based package. Both New York and Illinois cautioned us that performance-rate structures, if well conceived, already include “poor performance” and you could use the term penalty-based rates.

Commissions were requested to indicate which (if any) of the following groups were involved with their PBR decision-making efforts: neighboring states, NARUC, other states, utilities under the jurisdiction of the commission, other groups, and none.

Fourteen of the 15 commissions responding to the question indicated that they do coordinate their PBR development efforts with the utilities under the commission’s jurisdiction. Three work with neighboring states and only two work with any NARUC committees in their efforts. One works with non-neighboring states and one works with the industrial energy consumer group within the state.

Forty-six commissions replied to the final question, which sought the criteria being used by the commissions for measuring electric utility performance.

Twenty-three commissions were using either or both SAIDI (system average interruption duration index) or SAIFI (system average interruption frequency index) to measure electric utility performance. Nineteen are using qualitative measures. Eleven are making use of standard guidelines other than SAIDI and SAIFI. Twenty-five commissions are using other criteria in measuring electric utility performance.

Many commission staff members provided Newton-Evans staff with additional insights into the criteria they were using to measure electric utility performance. (These were appended to the report).

Other uniform guidelines being used by state commissions include: customer complaints, MAIFI (momentary average interruption frequency index) measures, and others.

Qualitative measures are being used at 18 commissions. These include the broad category of “customer complaints” which almost every one of the commissions indicated as the basis for the “qualitative” measure they were using.

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Other criteria being used by utility regulatory commissions across the country included: customer outage call response times, customer guarantees, energy cost adjustments, storm outage measures, and combinations of quantitative measures such as SAIDI and SAIFI.

PBR and spending

Newton-Evans conducted a separate survey with utilities located in the states that have implemented or are planning to shortly implement performance-based rate structures, or penalty-based rates.

The results of this study suggested that there is a correlation between the imple-mentation of PBRs and an increase in both capital and O&M spending for distribution infrastructure and automation. Much is dependent upon individual utility situations with regards to present level of distribution network and substation automation.

From indications provided by officials from several of the largest IOUs in states that have implemented PBRs, there seems to be a reverse correlation between the implementation of penalty-based rates, and capital spending, wherein spending is not undertaken, until and unless the public service commission invokes a penalty, and that penalty amount may be paid directly to the state authorities, or that penalty total may serve in some instances as a minimal amount to be allocated to “fixing the weak points” in the power delivery system.

The results from our survey of officials at investor-owned utilities in states that have implemented performance-based rates indicate the following effects on various budget categories:

The 11 states identified as PBR-adoption states by their public service commissions account for a total of 32 percent of the

country’s utility customers (inclusive of residential, industrial and commercial types). Two additional states considering use of PBR structures account for an additional six percent of the nation’s electricity customers.

These findings suggest that if we take roughly one-third of the increased levels of spending noted for each category in the previous subsection, we have an idea of the overall, largely positive, impact on utility T&D spending.

Our conclusion is that the country’s level of infrastructure and automation-related spending increases with the development of PBRs for each additional state that develops such rates programs. PBRs are directly impacting utility capital and operating budgets, by causing increased spending to decrease the frequency and duration of unplanned outages, and to minimize the impact of those outages.

To date, based on the nearly one-third representation (in terms of served end-use customers) of PBR adoption in only eleven states, the impact of these states’ utilities (investor-owned) has probably caused an increase in overall nationwide spending in almost every power distribution category by at least two percent, and probably by four percent. If the use of PBRs was expanded to all states and D.C., we believe the effect would be double-digit growth for utility distribution spending over several years.

Newton is president of Newton-Evans Research Company Inc. This article was written based on information contained in the recent Newton-Evans Research Company publication titled “Performance Based Rates in the U.S.: A Study of Usage Patterns and Impact on Capital Budgets and O&M Spending.”

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