Performance Based Regulation Plans: Goals, Incentives and Alignment
DTE Energy retained The Brattle Group to review and analyze performance based regulatory (PBR) frameworks that have been applied to electric and natural gas distribution utilities in the United States as well as elsewhere in the world. DTE initiated Brattle’s “benchmarking” study in order to inform its management team as well as to be responsive to recent legislation enacted in Michigan Public Act 341 of 2016 Section 6U (PA 341) which directed the Michigan Public Service Commission (MPSC or Commission), in collaboration with representatives of each customer class, utilities, and other interested parties, to study these frameworks.
Performance-based regulation (or performance-based ratemaking) has been used synonymously with incentive regulation (or incentive-based ratemaking, IBR), and generally refers to a regulatory framework that motivates utilities to improve their performance by enticing them with the opportunity to increase their earnings, more so than would be the case under more traditional cost-of-service regulation. There is not a bright line separating traditional cost of service ratemaking from PBR, as even traditional cost of service ratemaking provides a financial incentive to control costs via regulatory lags. However, PBR is generally differentiated by the methodical incorporation of incentives into the regulatory framework.
