PCCA Journal 4th Quarter 2013 - page 24

PCCA Journal|4
th
Quarter 2013
24
N
early one year ago,
Hurricane Sandy struck
the East Coast of the
United States, leaving 72
dead, damaging 650,000
homes, and knocking out power for 8.5
million Americans. This anniversary
serves as a reminder of the challenges
facing electric distribution companies as
they plan for the future design and op-
eration of the power grid. These utilities
are expected to improve their resiliency
during severe weather events, replace
aging infrastructure, integrate greater
quantities of renewable and distributed
generation, and secure their systems
against cyber and physical attacks.
“Tackling today’s emerging challenges
is a daunting task for utilities, consider-
ing that most operate under a regulatory
model set in the first half of the last
century,” said David Malkin, director
of Government Affairs and Policy for
GE’s Digital Energy business. “If we
wish to build out a modern grid—one
that meets these challenges and delivers
long-term value to consumers—then we
must rethink how utilities are currently
regulated.”
GE released a new report in October
outlining the benefits of modernizing
the power grid, 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 invest-
ment. Today’s increased expectations of
utilities arise at a time of slowly grow-
ing, 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 dis-
tribution 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 modern-
izing the power grid, with many utilities
across the country reporting promising
results,” Malkin said. “But these utili-
ties 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 ef-
ficiency, innovation, and service quality.
A new regulatory model is needed to cre-
ate a 21st century power grid and enable
utilities to deliver greater value to their
customers.
Results-Based Regulation
As regulators seek to meet current chal-
lenges 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.
Results-based regulation creates a
forward-looking contract to achieve
desired objectives and provide incentives
for delivering long-term value to custom-
ers. 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 pro-
vides an incentive for cost reductions.
• An earnings-sharing mechanism that
enables customers to benefit from util-
ity cost savings.
• Clearly defined performance metrics
and incentives for delivering value to
customers.
• Funding set aside for innovation
projects.
The goal of this report is to advance
conversations on the design of forward-
looking regulatory models to meet to-
day’s energy challenges. The authors of
this paper include David Malkin, director
of Government Affairs and Policy for
GE’s Digital Energy business, and Paul
Centolella, former utility commissioner
and current vice president at Analysis
Group, a leading economics consulting
firm.
To download the report, view a data vi-
sualization, watch a video, or learn more
about the authors, visit gedigitalenergy.
com/regulation.
GE: Time to Rethink Electric Utility Regulation
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