MOVING TOWARD VALUE IN UTILITY COMPENSATION PART 2 – REGULATORY ALTERNATIVES

This research paper argues that traditional Cost of Service Regulation (COSR) incentivizes investor-owned utilities to over-invest in capital infrastructure at the expense of more efficient, non-utility-owned or non-capital alternatives. Through three case studies, the authors demonstrate that multiyear revenue caps and Performance Incentive Mechanisms (PIMs) can better align utility shareholder profits with societal goals, such as carbon reduction and cost-effective grid modernization.

• Cost of Service Regulation (COSR) creates a misalignment between utility incentives and societal value when non-infrastructure or non-utility-owned alternatives are more beneficial for society. Under COSR, utilities are incentivized to invest in capital because they earn a regulated rate of return on those investments, which can lead to sub-optimal outcomes when lower-cost, non-capital solutions are available.
• Multiyear revenue caps are identified as a powerful tool for aligning shareholder value with non-infrastructure strategies. In the analyzed cases, a benchmarked revenue cap created the clearest alignment between utility and customer value, particularly in encouraging the use of less expensive third-party approaches for large investments.
• Performance Incentive Mechanisms (PIMs) can monetize benefits that are currently uncaptured in utility regulation and motivate utilities to meet specific societal priorities, such as carbon reduction or peak demand reduction. However, PIMs alone may be insufficient to overcome the strong incentive for capital investment provided by COSR.
• The use of 'stretch factors' within revenue caps further encourages cost containment by simulating competitive pressure, reducing the revenue cap by a fixed percentage each year to push the utility toward greater efficiency.
• In the context of regional capacity and environmental performance, shifting fuel price risk to utilities through modified fuel cost adjustment mechanisms can be less effective than outcome-oriented regulation. The paper suggests that combining revenue caps with CO2 PIMs can better motivate utilities to find the least-cost method for reducing carbon emissions.

APA

Aas, D., & O’Boyle, M. (2016). MOVING TOWARD VALUE IN UTILITY COMPENSATION PART 2 – REGULATORY ALTERNATIVES. Energy Innovation. https://energyinnovation.org/wp-content/uploads/2016_Aas-OBoyle_Reg-Alternatives-1.pdf

Chicago

Aas, Dan, and Michael O’Boyle. MOVING TOWARD VALUE IN UTILITY COMPENSATION PART 2 – REGULATORY ALTERNATIVES. Energy Innovation, 2016. https://energyinnovation.org/wp-content/uploads/2016_Aas-OBoyle_Reg-Alternatives-1.pdf.

Wikipedia

{{cite report |last1=Aas |first1=Dan |last2=O’Boyle |first2=Michael |title=MOVING TOWARD VALUE IN UTILITY COMPENSATION PART 2 – REGULATORY ALTERNATIVES |publisher=Energy Innovation |date=June 2016 |url=https://energyinnovation.org/wp-content/uploads/2016_Aas-OBoyle_Reg-Alternatives-1.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{aas2016moving, author = {Aas, Dan and O’Boyle, Michael}, title = {{MOVING TOWARD VALUE IN UTILITY COMPENSATION PART 2 – REGULATORY ALTERNATIVES}}, institution = {Energy Innovation}, year = {2016}, month = jun, url = {https://energyinnovation.org/wp-content/uploads/2016_Aas-OBoyle_Reg-Alternatives-1.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }