The Nuts and Bolts of Performance-Based Regulation

This guide by RMI introduces Performance-Based Regulation (PBR) as a regulatory approach for electric utilities designed to align utility incentives with customer and societal interests. It contrasts PBR with traditional cost-of-service regulation (COSR), which the document argues creates perverse incentives such as 'gold plating' and 'capex bias' that hinder the clean energy transition. The guide details various PBR tools—including revenue decoupling, multi-year rate plans, and performance incentive mechanisms—and provides a framework for moving from incremental to comprehensive PBR reform.

• Traditional cost-of-service regulation (COSR) creates several perverse incentives that obstruct the transition to affordable clean energy. These include 'gold plating,' where utilities overinvest in capital projects to increase returns; 'capex bias,' which favors capital-intensive projects over cheaper operating expense (opex) solutions; and the 'throughput incentive,' which motivates utilities to increase energy sales to grow revenue, often at the expense of energy efficiency.
• Performance-Based Regulation (PBR) is a collection of tools used to align utility incentives with societal interests by compensating utilities based on target outcomes rather than just costs. PBR can encourage the adoption of cost-effective alternatives to traditional transmission, such as grid-enhancing technologies (GETs) and demand-side management (DSM), by introducing cost-control incentives and mitigating capex bias.
• Revenue decoupling, specifically through a revenue decoupling mechanism (RDM), removes the throughput incentive by delinking utility revenues from total energy sales. It ensures the utility recovers approved fixed costs regardless of sales volume, which reduces utility resistance to energy efficiency and distributed energy resources (DERs), though it may reduce incentives for end-use electrification.
• Multi-year rate plans (MYRPs) set revenue requirements and base rates for multiple years to encourage cost efficiency and reduce the frequency of rate cases. These plans often use an 'X factor' to represent productivity growth, which is typically estimated by analyzing a peer group of similar utilities through total factor productivity (TFP) studies.
• Performance Incentive Mechanisms (PIMs) tie utility revenues to specific outcomes using a metric, a target, and a financial incentive. PIMs can be used to drive emergent outcomes such as social equity, grid resilience, and demand flexibility. Examples include fuel-cost sharing mechanisms, which give utilities 'skin in the game' by reducing the true-up between expected and actual fuel costs to less than 100%.
• Comprehensive PBR is distinguished from incremental PBR by a 'Four Pillars Model' that fundamentally restructures the regulatory framework. These pillars are: incentivizing cost-efficiency, removing the throughput incentive, equalizing capex and opex incentives, and incentivizing targeted outcomes.
• Case studies illustrate different paths to PBR: Hawaii implemented a comprehensive framework in 2020 following a strong legislative directive (SB 2929) that required the PUC to break the link between revenues and investment levels. In contrast, Colorado's approach has been more incremental, with the legislature (SB 19-236) directing the PUC to report on whether a transition to 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} }