The Nuts and Bolts of Performance-Based Regulation

The document argues that traditional cost-of-service regulation (COSR) creates perverse incentives—such as 'gold plating' and 'capex bias'—that hinder the affordable deployment of clean energy and demand-side management. It proposes a transition toward Performance-Based Regulation (PBR), which compensates utilities based on target outcomes rather than costs. The guide details a 'Four Pillars Model' for comprehensive PBR: incentivizing cost-efficiency, removing the throughput incentive, equalizing capex and opex incentives, and incentivizing targeted outcomes. Key tools discussed include revenue decoupling, multi-year rate plans (MYRPs), and performance incentive mechanisms (PIMs). The text contrasts incremental PBR, which layers tools onto COSR, with comprehensive PBR, which fundamentally restructures the regulatory framework, citing Hawaii's 2020 framework as a comprehensive example.

• Traditional cost-of-service regulation (COSR) creates several perverse incentives that obstruct a clean energy transition: 'gold plating' (overinvesting in capital projects), 'capex bias' (preferring capital-intensive projects over operating expenses), a 'throughput incentive' (motivating increased energy sales), and resistance to third-party or customer-owned solutions.
• Revenue decoupling mechanisms (RDMs) address the throughput incentive by delinking utility revenues from total energy sales, ensuring the utility recovers approved fixed costs without profiting from increased sales.
• Multi-year rate plans (MYRPs) encourage cost efficiency by setting revenue requirements for multiple years, often using an 'X factor' to represent productivity growth and a 'stretch factor' to account for a utility's ability to catch up to industry peers.
• Capex-opex equalization strategies, such as 'totex ratemaking' (where utilities earn the same return on both capital and operating expenditures), aim to eliminate the bias toward capital-intensive projects.
• Performance Incentive Mechanisms (PIMs) tie financial rewards or penalties to specific metrics and targets, allowing regulators to drive outcomes such as social equity, grid resilience, and demand flexibility.
• Comprehensive PBR is distinguished from incremental PBR by its fundamental restructuring of the regulatory framework around four pillars: incentivizing cost-efficiency, removing the throughput incentive, equalizing capex and opex incentives, and incentivizing targeted outcomes.
• The impact of legislation varies by state; for example, Hawaii's SB 2929 provided a stronger directive to 'break the direct link between allowed revenues and investment levels' compared to Colorado's SB 19-236, which only required a report on whether PBR would be 'net beneficial'.

APA

Rosenbach, C., Rebane, K., Goldenberg, C., Walmsley, A., & Proffer, B. (2024). The Nuts and Bolts of Performance-Based Regulation. RMI. https://rmi.org/app/uploads/dlm_uploads/2024/07/PBR_Deck_final.pdf

Chicago

Rosenbach, Carina, Kaja Rebane, Cara Goldenberg, Alex Walmsley, and Ben Proffer. The Nuts and Bolts of Performance-Based Regulation. RMI, 2024. https://rmi.org/app/uploads/dlm_uploads/2024/07/PBR_Deck_final.pdf.

Wikipedia

{{cite report |last1=Rosenbach |first1=Carina |last2=Rebane |first2=Kaja |last3=Goldenberg |first3=Cara |last4=Walmsley |first4=Alex |last5=Proffer |first5=Ben |title=The Nuts and Bolts of Performance-Based Regulation |publisher=RMI |date=July 2024 |url=https://rmi.org/app/uploads/dlm_uploads/2024/07/PBR_Deck_final.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{rosenbach2024nuts, author = {Rosenbach, Carina and Rebane, Kaja and Goldenberg, Cara and Walmsley, Alex and Proffer, Ben}, title = {{The Nuts and Bolts of Performance-Based Regulation}}, institution = {RMI}, year = {2024}, month = jul, url = {https://rmi.org/app/uploads/dlm_uploads/2024/07/PBR_Deck_final.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }