Modernizing the regulatory model so that it incentivizes investment, efficiency and innovation is fundamental to modernizing our power grid, says GE in a newly released white paper.
Utilities are expected to tackle a range of emerging issues, such as advanced outage management, integration of renewable generation, and cyber security, yet they are held to regulatory standards set in the first half of the last century, states the paper.
Specifically the paper, titled 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. 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,” commented David Malkin, director of Government Affairs and Policy for GE’s Digital Energy business, and a co-author of the paper. “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.”
The paper offers a results-based regulatory model as an alternative, citing as an example the United Kingdom’s newly adopted “RIIO”, or “Revenue set to deliver strong Incentives, Innovation and Output”, model. Its major components 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.