Results-Based Regulation

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Results-Based Regulation: A Modern Approach to Modernize the Grid

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. In order to modernize our power grid, we should first modernize the regulatory model so that it incentivizes investment, efficiency and innovation.

As regulators seek to meet current challenges without discarding the traditional objectives of regulation, a results-based model offers an attractive alternative. Results-based regulation is designed to support investments that share the cost savings with customers, reward utilities for exceptional performance, remain affordable by encouraging operational efficiencies and address emerging issues that impact the public good.

View the video below to learn about the challenges of operating in today's regulatory environment.

David Malkin
Director, Government Affairs & Policy
GE Digital Energy

David Malkin is the Director of Government Affairs and Policy for GE Digital Energy, a leading supplier of electric transmission and distribution technologies. He coordinates and directs Digital Energy's global government relations portfolio, and is responsible for positioning GE as a trusted advisor to policymakers and regulators on a range of electricity issues.

In the United States, David is active at both the Federal and State level on policy and regulatory matters related to grid modernization. He serves on the Board of Directors of the Demand Response and Smart Grid Coalition, and was among a select group of industry experts chosen to advise the Bipartisan Policy Center's Initiative on Delivering Electric System Reliability and Clean Technology.

Previously, David led GE Energy's Policy Center of Excellence, conducting political, regulatory and macroeconomic analysis in support of the global Government Affairs and Policy team.

Prior to joining GE, David worked for the U.S. Government as a defense and national security policy analyst. He also spent 5 years on active duty as an Army Intelligence Officer. David holds a Bachelor's Degree in International Relations from the United States Military Academy at West Point, NY and a Master's Degree in Public and International Affairs from Princeton University.

Paul A. Centolella
Vice President
Analysis Group, Inc.

Paul Centolella, a former commissioner of the Public Utilities Commission of Ohio (PUCO), has both public and private sector experience in regulation, economic and energy consulting, and public utility and environmental law. During his 30-year career, he has performed economic assessments of energy markets for power systems operators and has analyzed policies related to energy pricing, investments, innovation, and security. He has extensive knowledge about the design of energy and environmental markets, as well as the integration of modern information and communications technology into electric power system operations.

Paul has served on a range of energy-related working groups and task forces, including the Secretary of Energy's Electricity Advisory Committee, the Electric Power Research Institute's Advisory Council, and the Smart Grid Interoperability Panel Governing Board. Paul is a member of the Ohio, California, and Washington State Bar Associations, the American Economic Association, and the International Association for Energy Economics. He holds a J.D. from the University of Michigan Law School, and a B.A. in economics from Oberlin College.

Creating a Modernized Grid Requires Modern Regulation

Today's electric distribution companies face a fundamental dilemma as they plan for the future design and operation of their networks. Increasingly, these utilities are expected to improve their resilience during severe weather events, replace aging infrastructure, integrate greater quantities of distributed and variable renewable generation, and secure their systems against cyber and physical attacks. Yet these expectations arise at a time of slow growing, flat, or declining sales - a trend that impedes a utility's ability to recover its fixed costs and discourages much-needed capital investment.

This dilemma is rooted in the fact that the rates of most electric distribution utilities continue to be set under a model focused on reviewing utility costs. Utilities face a regulatory lag between when they make an investment and can recover their costs in rates, which can negatively impact cash flow. During a period of rising costs but slowly growing sales, this lag can impair a utility's earnings and compel it to defer discretionary investments that could benefit customers. Moreover, cost of service regulation can slow the pace of innovation and may offer little incentive for utilities to improve operational efficiency or service quality beyond the minimum levels set by regulators.

Some regulators have experimented with alternative models - including capital trackers or multi-year revenue caps - to provide either greater support for new investments or stronger incentives for utilities to reduce costs. However, such alternatives may not effectively integrate incentives for efficiency, innovation, and service quality. A new regulatory model may be needed to create a twenty-first century power grid and enable utilities to deliver greater value to customers.

An Emerging Regulatory Model: Results-Based Regulation

As regulators look for a means to meet industry challenges without discarding the traditional objectives of regulation, a results-based model offers an attractive alternative. Results-based regulation is designed to support investments that deliver long-term value to customers, reward utilities for exceptional performance, and remain affordable by encouraging operational efficiencies and sharing the cost savings with customers.

One example of such an approach is the United Kingdom's newly-adopted "RIIO" model, or "Revenue set to deliver strong Incentives, Innovation and Output. "Its major components include:

Revenues set based on the regulator's review of a forward-looking utility business plan;
A multi-year revenue cap 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; and Funding set aside for innovative projects.

The goal of this paper is to advance conversations on the design of forward-looking regulatory models that can meet today's challenges. It examines the benefits of modernizing the power grid, the development and limitations of cost of service regulation, the incentives provided by alternative approaches to regulation, and how a results-driven regulatory model could support the transition to an efficient, reliable, and sustainable power system.

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White Paper Comments and Questions:
		Media Inquiries:
David Malkin Director, Government Affairs and Policy GE Digital Energy Email: [email protected]	Paul A. Centolella Vice President Analysis Group, Inc. Email: [email protected]	Allison Lilly Communications GE Digital Energy Email: [email protected] Tel: +1 404-904-5279