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In the wake of Tropical Storm Isaias in 2020, Connecticut lawmakers passed a wide-ranging bill aimed at increasing accountability of the state’s two large electric utilities. Part of that bill directed Public Utilities Regulatory Authority regulators to develop a system of performance-based regulation – where Eversource and United Illuminating would be paid based on how they meet certain standards.
After more than two years of work, PURA has keyed in on four goals: Operational performance, achieving public policies like greenhouse gas reduction, customer satisfaction, and “reasonable, equitable and affordable rates.”
PURA must next focus on metrics for each goal, and discover how to use those metrics to incentivize good results from the utilities. PURA dockets are usually dominated by utilities and other interested groups that file lengthy legal briefs, but members of the public can also submit comments into the record for the group to consider in their decisions.
CT Examiner’s energy reporter Brendan Crowley spoke with PURA Chair Marissa Gillett about performance-based regulation, why people should care, and how they should expect to see it reflected in their electric bills.
CROWLEY: Currently, rates are set based on the utilities’ costs. How does that change with performance-based regulation?
GILLETT: Utilities, not just in Connecticut, but across the country, across the world really, rely on cost-of-service ratemaking. At its core, it’s compensating the utility for the money it spends, plus a reasonable rate of return on any capital expenditure.
Performance-based regulation is a different take on how to compensate the utilities. You’re looking at the utility’s rate of return on [infrastructure that’s] used and useful, and you’re taking a step back and saying: Do those investments further the state’s objectives?
That’s what phase one was about – providing clarity about what those objectives are and what outcomes we’re looking to see. When you’re evaluating the investments, and especially what profits the utilities can expect to earn, you’re changing the lens to view it more through whether those investments helped further those objectives.
CROWLEY: How does it work? Do the utilities still get a set return, then a cut or a bonus based on the metrics?
GILLETT: There are a couple things that go into the determination of their return on equity. What we’re going to be determining is whether there needs to be a floor. Is the floor the cost of debt, and then you’re layering on top increments that make up the profit?
So, for example, instead of guaranteeing the opportunity to earn a 9.25 percent return on equity in a year, maybe 25 basis points is tied to customer satisfaction, or another one of our goals.
But there’s more than just the ROE [return on equity] that you can look at. In the Aquarion decision, we tie the [ability to charge customers for] executive compensation to achieving metrics. So I don’t want to suggest that this will be confined to the utility’s profit margin. I think there are ways to be creative, and that’s really what we’re going to be looking at in the second phase.
There’s 100-plus years of U.S. Supreme Court precedent. We all kind of live and die by the standards of what’s “reasonable and prudent,” “used and useful,” “known and measurable.” We’re not departing from a century of legal precedent.
But you might change how you look at a capital improvement project. Let’s say one of the utilities wants to rebuild a mile of their distribution system. Historically, the analysis would have looked at if they made a “prudent decision” based on whether other utility managers would have decided to rebuild that section and whether they procured supplies and labor competitively.
When you’re talking about performance-based regulation, you’re looking at whether they achieved other objectives. So we have resilience and reliability goals. Maybe we look at that mile where they put back up poles and wires, but we wanted them to reduce the length of outages, and that could have been done through strategic undergrounding. So you’re layering on whether their investment achieved the objectives you’ve laid out for them.
Part of it is figuring out the carrot and the stick. Maybe they come in and say it’s going to cost us $5 million. And we say, fine, but you have to shave 10 minutes off your outages. So they do a project to shave 10 minutes off their outages, and it costs $4 million. You can use an earnings sharing mechanism and maybe they get to keep half of the $1 million left over, and the ratepayer keeps the other half.
CROWLEY: One of the goals I think people will be very interested in is reasonable, equitable and affordable rates. What does that mean for customers? Should they expect to actually see lower rates?
GILLETT: I think what they should expect is that they should be getting demonstrable value out of what they’re paying.
Affordability is a metric we’re trying to move toward, and we’ve instituted the low-income discount rates. The industry metric right now is that folks should be spending no more than 6 percent of their disposable household income on energy costs. I’m sure that will continue to evolve and get more granular about what percent for heating, what percent for cooling?
But I think what folks should expect is that we are going to be targeting affordability as defined by that metric, and others we develop alongside that.
CROWLEY: How does performance-based regulation ensure rates are in that range? Is it incentivizing new affordability programs, or a scaled rate structure?
GILLETT: I think we want to be creative here. The point is that utility executives aren’t compensated in a way that would drive them to do a better rate design, to control costs. There’s nothing sending them a signal to get creative around this.
Some of the metrics we laid out in the Aquarion decision tied executive compensation to: What percentage of your customer base enrolled in low-income programs? How many community events did you do to educate about them? How well were they attended?
It’s vitally important for low-income customers to be aware of those offerings, but it’s also important to the larger customer base because of the feedback loop on arrearages [where all customers end up paying the cost of unpaid bills].
You say, “We want folks to pay no more than 6 percent of their disposable income on energy,” and then you figure out ways that we might get there.
CROWLEY: Two of the goals are performance, including reliability and resilience, and affordability. How are those two things balanced in performance-based regulation?
Every time there’s a storm and the power’s out for a long time, the conversation of burying lines comes up, and just how expensive that would be. So how do you manage a situation where a utility could come in and say, “We can make huge improvements in resilience by burying lines, but that comes with a huge rate increase”?
GILLETT: A lot of the ways that you can balance the objectives is by getting more granular with the data.
Historically, the utilities have only measured reliability on a systemwide basis. So all residential customers of Eversource are paying the same rate, but we know that not all customers are receiving equivalent service.
A systemwide average might be 100 and some odd minutes of outages in a year, but when it comes to your individual circuit, you might be 20 minutes above that average – something very worse off than the system, but you’re paying the same.
So when you start being more granular, you can target your spending, and I think that helps us balance these objectives. We’re not going to deploy millions of dollars of capital simply to increase system reliability when these utilities already have good blue sky reliability. But maybe we spend a million dollars helping a couple circuits and disadvantaged communities that are continuously experiencing worse than average service.
CROWLEY: I’m sure you hear this all the time, that many people don’t think that anything PURA is going to do – or really that anyone is going to do – is going to make a significant difference for them. Why should people care about changing from cost-of-service to performance-based regulation? Why should they give their input or care about the outcome of this?
GILLETT: I do hear that often, typically at the PURA 101 events when I walk through the different components of the bill and the different drivers of the costs in the bill. I do see some folks deflating when they realize you have to interact with more than just PURA. You’ve got the state Legislature and the federal government that’s part of your bill.
So I definitely hear all the time, “Why should I interact? And if I spend the time to interact, are you gonna listen? And why should I care?”
We are a very high-cost state for the price per kilowatt hour, and there are a lot of reasons we got there. Some are tied to geography, and certainly we can’t pick up Connecticut and drop it inside Pennsylvania.
But there are other aspects of our place and how we got there that, while you can’t unwind all of them overnight, you can make incremental progress. And when you’re faced with an entity like PURA that can only make decisions based on the evidence put before us, it’s critically important that folks weigh in early and often. Even if it’s going to take a year, two years, three years to see the results.I think we are delivering on a lot of the objectives that we laid out.
I hope through the implementation of performance-based ratemaking that folks really see their fingerprints in the result. We spend so much of our disposable income on utilities, you’re weighing in on something that makes up a huge portion of people’s monthly budgets. As a mother of two small children, recognizing no one really has extra time, I can’t think of a more impactful place to devote some time.