This article was based on research supported by Sophie Kielian, a former intern with RMI.

This is the first article in a two-part series that examine best practices for evaluating performance incentive mechanisms (PIMs). The second article can be found here.

In 2024, New York’s Con Edison enrolled over 20,000 electric vehicle (EV) drivers in its residential managed charging program, representing a 65 percent increase from the end of 2023. This surge in participation contributed to an 11 percent reduction in EV charging during system peak hours compared to the previous year, supporting more cost-effective management of peak demand. These results were enabled by the utility’s earnings adjustment mechanisms (EAMs), New York’s version of performance incentive mechanisms (PIMs). PIMs are regulatory tools that tie a portion of utilities’ earnings to the utilities’ performance on desired regulatory outcomes. Con Edison’s residential managed charging EAM provided financial motivation for the for the company to launch new customer outreach and education programs to drive these improvements.

Another EAM targeting transportation electrification — the transportation interconnection timeline EAM — was designed to accelerate the deployment of transportation electrification infrastructure. Following the implementation of the interconnection EAM, the Company implemented system enhancements and task automation throughout the interconnection process to improve communication, tracking, and visibility, resulting in faster timelines compared to historical performance.

These promising outcomes from Con Edison come at a pivotal moment in the energy transition as utilities ramp up investment to meet rising demand, modernize aging infrastructure, and enhance system resilience. As this spending accelerates, it is more important than ever that utilities control costs and ensure investments deliver clear, measurable benefits for ratepayers. Energy affordability remains one of the most urgent challenges facing the US energy sector. Since 2019, utility-collected revenues have increased by more than 20 percent, driving up energy bills across the country and contributing to an affordability crisis for many customers.

In response, many regulators are turning to PIMs and other performance-based regulation (PBR) tools to align utility incentives with cost containment and other policy priorities. PIMs offer financial rewards for meeting measurable targets (or penalties for failing to do so). When designed well, PIMs can provide a powerful opportunity to prompt utilities to advance least-cost deployment of resources and generate savings that exceed costs (this is particularly effective where utilities already lack incentives to do these things in the regulatory framework).

However, if not designed effectively, PIMs can contribute to increasing costs. RMI’s PIMs Database shows that most PIMs are structured as upside-only or symmetrical, which means utilities can earn additional revenues funded by ratepayers. While these rewards typically represent a modest share of overall utility revenues — for example, Con Edison’s total earnings from its full EAM portfolio amounted to less than 1 percent of its overall revenues in 2024 — they can still represent a meaningful cost to ratepayers, especially those already facing affordability challenges.

As regulators seek to contain costs, it is critically important to evaluate the effectiveness of existing PIMs. To play a meaningful role in addressing affordability, PIMs must be evaluated not just on intent, but on actual outcomes. In this context of growing utility spending, states should assess whether the right mechanisms are in place to support cost control — and where PIMs are used, ensure they deliver net benefits to customers.

How states are currently approaching PIM evaluation

RMI spoke with several regulators in the US Northeast at the leading edge of PIM innovation. Each has implemented and evolved at least one PIM across multiple rate plans. Based on these conversations, we identified three key ways that these states are currently evaluating PIMs and provide four recommendations to improve the process and ensure customers are paying only for meaningful benefits (article 2).

All states with PIMs have mechanisms for evaluating the performance of a utility against a particular PIM, which is needed to determine what incentives utilities have earned. Here, we focus on the actions states are taking to evaluate whether the PIM or portfolio of PIMs is working as intended to drive progress on an intended outcome.

Note: Evaluating PIMs is complex and context dependent. A utility meeting its targets and earning an incentive doesn’t necessarily indicate success — targets may be too easy to meet, or the metric might not be a valuable indicator of the desired policy outcome. While overarching principles and frameworks can guide PIM evaluation across states, each PUC is best positioned to determine how to assess performance in light of its own policy priorities and state-specific conditions.

1. Strong focus on design, limited emphasis on retrospective evaluation

The PUCs we interviewed have generally emphasized the critical step of getting PIMs right at the design stage but have often allocated fewer resources to evaluating whether these mechanisms worked as intended.

Some states, like Rhode Island, have developed robust guidelines that help ensure PIMs are purposeful, measurable, and aligned with broader policy goals before they are approved. Rhode Island’s PIM Guidance Document outlines eight core design principles, including clarity of purpose, transparency, alignment with state policy objectives, and the use of meaningful metrics. These principles help ensure that PIMs are structured to drive real, measurable improvements in utility performance and customer outcomes from the outset.

Building on that foundation, similar principles could be applied to evaluating PIMs after implementation. Doing so could help answer important questions: Did the PIM support the intended policy goal? Was the performance target appropriately ambitious? Was the incentive well-calibrated? As commissions continue to evolve their use of performance mechanisms, integrating thoughtful evaluation practices can help ensure that PIMs are not only well-designed, but also delivering meaningful results.

2. Siloed development and evaluation comes with tradeoffs

In the states we spoke with, PIMs are often developed, implemented, and evaluated in distinct regulatory siloes, depending on the program area. For example, in Massachusetts, energy efficiency PIMs are handled within a dedicated proceeding outside the rate case process, while PIMs associated with the state’s multi-year rate plan are designed and evaluated within general rate cases. This separation allows regulatory staff to specialize, developing subject-matter expertise and oversight capacity in specific areas such as energy efficiency or grid modernization. In the context of limited staff capacity, such specialization can be a practical and effective way to manage complex regulatory workloads.

However, this siloed approach also introduces challenges. Developing PIMs in isolation from one another can limit regulators’ ability to assess how different mechanisms interact or contribute collectively to policy goals like affordability, decarbonization, or equity. PUC staff working in one proceeding may not be fully aware of the design or performance of PIMs in another, making it more difficult to take a coordinated, system-wide view. Institutional knowledge and insights gained in one context may not be consistently applied across other dockets. Without intentional coordination mechanisms, states may miss opportunities to harmonize incentives or avoid duplication across the regulatory framework.

3. PIM evaluation tends to occur in rate cases

In the states we examined, PIMs are most often designed and evaluated within the context of utility rate cases. This approach offers certain advantages: rate cases provide a structured venue where utilities, regulators, and stakeholders can collectively examine utility performance and negotiate the continuation, modification, or retirement of PIMs. Embedding PIMs in this framework can streamline regulatory processes and ensure that incentive mechanisms are aligned with broader discussions about overall utility revenue requirements.

However, relying on the rate case cycle for PIM evaluation can also create limitations. Rate cases are highly complex proceedings covering numerous issues, many of which may not receive sufficient attention from the PUC and intervenors. When PIMs are only evaluated as part of subsequent rate cases, the review process may accordingly be narrow in scope, focused primarily on whether a mechanism should be continued or modified, rather than assessing its full performance history or value to ratepayers. Additionally, because utilities typically lead the development and submission of PIM proposals within rate cases, the range of mechanisms under consideration may reflect what utilities are willing to put forward, rather than the full breadth of regulatory priorities. This dynamic may constrain innovation and exclude certain types of mechanisms — such as downside-only PIMs — that could offer value but are less attractive from a utility perspective.

Taken together, these insights highlight the importance of complementing thoughtful design with equally robust evaluation practices – giving states the opportunity to better understand what’s working and refine what isn’t.

Read the second article in this series, which covers recommendations for regulators on performance incentive mechanism evaluation.