California faces an electricity affordability crisis, with rates soaring far beyond national averages and contributing to financial distress for many households. In order to build a cleaner, more reliable, and more affordable energy system, California policymakers should look to performance-based regulation.
What is performance-based regulation?
Performance-based regulation (PBR) describes a set of policy tools that align a utility’s financial interests with public policy goals and consumer benefits. Current ‘cost of service’ regulation uses a cost-plus methodology, meaning utilities earn a return on how much they spend on capital investments, which ensures cost recovery and the financial viability of a utility. High electricity prices are a direct consequence of the cost inefficiencies that are exacerbated by the cost-plus approach.
PBR provides a better and more flexible framework for delivering affordable and clean energy. A more comprehensive PBR mechanism for California would:
- Provide strong incentives to minimize costs resulting from competitive cost benchmarks;
- Remove the bias for capital expenditures by allowing all expenditures to earn a return;
- Continue to decouple revenues from sales to encourage energy efficiency; and
- Advance critical clean air and climate goals by embedding these goals into performance targets with rewards and penalties if the targets are not met.
PBR, combined with new regulations that provide real-time pricing for DER and incentivize all the values they contribute to communities and the grid, will allow California to accelerate progress toward state climate goals while making electricity more affordable for ratepayers.