How to Restructure Utility Incentives

Performance-based regulation (PBR) is an alternative to traditional cost-of-service regulation (COSR) that aims to improve the alignment between the incentives utilities face and the interests of customers and society. Though PBR is not new, it has been attracting more attention in recent years due to the growing mismatch between traditional COSR and modern policy goals.

This report provides guidance to regulators and stakeholders on how to use PBR to better achieve important objectives such as affordability, resilience, decarbonization, and social equity. It draws a distinction between incremental and comprehensive forms of PBR, and it defines the latter as resting on four pillars. These pillars consist of incentivizing cost efficiency, removing the throughput incentive, equalizing the incentives between capital expenditures and operating expenses, and incentivizing targeted outcomes. Together, they address the key shortcomings of traditional COSR.

The report also provides an overview of the PBR tools available, discusses how the Four Pillars Model can be used to support the reform process, and provides tips for regulators and stakeholders on how to effectively navigate the process. Hawaii’s comprehensive PBR framework is discussed as a case study.