by Shane Henson — November 1, 2013—In an effort to advance conversations on the design of forward-looking regulatory models to meet today’s energy challenges, GE recently released a white paper outlining the benefits of modernizing the power grid, the hurdles that impede the upgrade of U.S. electrical infrastructure, and how moving to a results-driven regulatory model could support the transition to an efficient, reliable, and sustainable power system.
The report, Results-Based Regulation: A Modern Approach to a Modern Grid, finds that the current model impedes a utility’s ability to recover fixed costs and discourages much-needed capital investment. Today’s increased expectations of utilities arise at a time of slowly growing, flat or declining sales, as total U.S. electricity sales decreased by 1.8 percent in 2012 and have fallen in four of the last five years, says GE. This dilemma is rooted in the fact that the rates of most electric distribution companies continue to be set under a model focused on the utility’s cost of service rather than on delivering value to customers.
“We are in the early stages of modernizing the power grid, with many utilities across the country reporting promising results,” explains David Malkin, director of government affairs and policy for GE’s digital energy business. “But these utilities continue to face cost recovery rules that can negatively impact their cash and earnings, and may compel them to defer needed capital investments. Equally important, most utilities have little incentive to improve efficiency or service quality beyond the minimum levels required by regulators. Given these conditions, it’s not clear that the current regulatory model will support the investments needed to meet today’s challenges.”
Some regulators have experimented with alternative models to provide greater support for new investments or stronger incentives to reduce costs. However, such alternatives may not effectively integrate incentives for efficiency, innovation and service quality. A new regulatory model is needed to create a 21st century power grid and enable utilities to deliver greater value to their customers, asserts GE.
GE recommends a results-based regulation model to create a forward-looking contract to achieve desired objectives and provide incentives for delivering long-term value to customers. Key elements can include:
- Revenues set based on the regulator’s review of a forward-looking utility business plan.
- A multi-year revenue plan that provides an incentive for cost reductions.
- An earnings-sharing mechanism that enables customers to benefit from utility cost savings.
- Clearly defined performance metrics and incentives for delivering value to customers.
- Funding set aside for innovation projects.
