The ABCs of PBR
- Univ. of California, Irvine, CA (United States)
In the alphabet soup of regulatory acronyms, performance-based ratemaking (PBR) may help shape events well into the next century. At present, PBR is being implemented or considered by public utility commissions (PUCs) in over 20 states. State regulators are increasingly aware that major industrial sectors such as electricity, gas, and telecommunications can play a key role in creating or destroying competitive advantages. This concern over economic competitiveness is fueling the PBR experiment. The basic premise of PBR is that traditional, cost-plus regulation does not teach utility managers to minimize costs but rather to strategically conceal their firm`s true minimum cost curve. The mechanics of implementing an effective PBR systems are relatively straightforward. First avoid setting the baseline revenue requirement too high. Do not incorporate excessive escalators, indexing factors, or pass-through mechanisms. They can remove incentives in specific areas. Second, choose a progressive rather than regressive sharing mechanism with as many tiers as practical. Forgo PBR if potential gains are small relative to risk. Third, design a quality control mechanism that includes worker safety, system reliability, and customer service. Link rewards from cutting costs to penalties for cutting service or quality. The bottom line is that PBR is unlikely to be a panacea for the ills of traditional rate-base regulation, particularly when applied in a multi-period model of continuing regulation. PBR is unlikely to reduce administrative costs significantly and the analytical problems associated with setting the baseline revenue requirement alone are formidable and resource intensive. Information requirements are demanding for the program to succeed, and PBR should not be an experiment undertaken lightly.
- OSTI ID:
- 450598
- Journal Information:
- Fortnightly, Vol. 133, Issue 14; Other Information: PBD: 15 Jul 1995
- Country of Publication:
- United States
- Language:
- English
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