Performance-based ratemaking
Performance-based ratemaking (PBR) departs from the cost-of-service standard in setting just and reasonable utility rates, but that departure isn`t as easy as it looks. Up until now, cost-of-service ratemaking has provided relatively stable rates, while enabling utilities to attract enormous amounts of capital. Of late, however, regulators appear to be heeding the argument that changing markets warrant a second look. Throughout the country and across the utility industry, some regulators appear willing to abandon cost of service as a proxy for competition, instead favoring performance-based methods that would rely on competitive forces. These performance-based schemes vary in their details but generally afford utilities the opportunity to increase profits by exceeding targets for efficiency and cost savings. Moreover, these plans purport to streamline the regulatory process. Annual, accounting-type reviews replace rate hearings. Cost-of-service studies might not be required at all once initial rates are fixed. Nevertheless, these PBR plans rely on cost-based rates as a starting point and still contain safeguards to protect ratepayers. PBR falls short of true deregulation. As the Massachusetts Department of Public Utilities noted recently in an order approving a PBR variant known as price-cap regulation for New England Telephone and Telegraph Co., `price-cap regulation is not deregulation; it is merely another way for regulators to control the rates charged by a firm.`
- OSTI ID:
- 450602
- Journal Information:
- Fortnightly, Vol. 133, Issue 14; Other Information: PBD: 15 Jul 1995
- Country of Publication:
- United States
- Language:
- English
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