Regulatory incentives and prudence reviews
During the past several years, numerous large prudence case disallowances have occurred throughout the United States. Many of these cases concerned the construction of large nuclear facilities. Disallowances occurred despite the presence of incentive mechanisms that were used by various state public utility commissions. The regulatory model used during that period assumed that incentives were useful. Incentives were often viewed, however, as an exploratory exercise that might provide benefits. Still, the real mechanism used to protect ratepayers was the classical prudence case. And, as we saw during the 1980s, such cases were frequently used to prohibit utilities from passing unreasonable costs on to ratepayers. To avoid the system breakdowns and the resulting prudence cases, utilities and regulators must develop incentives that affect utilities' behavior to provide an optimal level of safe and adequate service at the lowest reasonable cost. If the incentives are simply viewed as an exotic regulatory mechanism, without being properly understood and implemented from an operational perspective at the utilities, they may not produce the desired outcome. In some instances they may be irrelevant to the final result. Several relatively new incentive mechanisms are promising. These include incentives that provide utilities with increased profits for implementing good customer-service programs or for achieving good performance in demand-side management (DSM) programs. Those incentives usually link a monetary reward or penalty in the form of a change to the earned rate of return to specific actions, such as the customer complaint rate for the utility or its success in installing certain DSM devices. These are promising because they relate to discrete events that can be easily understood by utility management and measured by regulators.
- OSTI ID:
- 7115065
- Journal Information:
- Fortnightly; (United States), Vol. 131:22
- Country of Publication:
- United States
- Language:
- English
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