Opinion: CT needs a business model for more affordable and reliable utility service
Connecticut residents are rightly frustrated with their electric bills.
Today, we have cleaner, cheaper, and more flexible energy technologies than ever before. Solar, batteries, energy efficiency, demand response, and advanced grid hardware and software can reduce costs, cut pollution, and improve reliability. Yet they aren’t being implemented as widely or rapidly as they should be, while costs continue to climb.
The reason isn’t a lack of technology. It’s the business model we use to run electric utilities. The major utilities in Connecticut still operate under a “cost-of-service” model. Designed in the early 20th century, it made sense when electricity systems were built around large power plants and analog technology. But today, that same model is holding us back.
There is good news. Connecticut has the solution at its fingertips: performance-based ratemaking. And in fact, this solution is at the finish line and ready for implementation, pending final regulatory approval.
Before explaining what performance-based ratemaking is, it’s important to understand the problem it’s designed to fix. Under cost-of-service regulation, utilities primarily earn profits by investing in capital infrastructure such as poles, wires, and substations. These capital expenditures are called the “rate-base.” Utilities are guaranteed their money back plus some percentage profit on it when invested prudently. Thus, a bigger rate base means more allowed earnings.
There is political and public pressure to keep rates low. However, that pressure collides with the reality that utilities compete for shareholders in financial markets, where investors expect returns. The way for utilities to deliver those returns under a cost-of-service model is not by minimizing total system costs, but by growing the rate base. Consequently, utilities are incentivized to favor the most expensive solution that meets regulatory requirements, rather than the most cost-effective one.
This problem is compounded by a significant information imbalance. Utilities usually control the engineering studies, forecasts, and models that determine what infrastructure is deemed “necessary.” Regulators work diligently, but they are often at the mercy of the studies run and information provided on solutions by the utilities.
Even more troubling is what utilities aren’t rewarded for. They do not earn more for decarbonizing the grid faster than legally required, reducing customer bills, or improving reliability and resilience beyond minimum standards. In short, we are asking utilities to innovate at their own expense.
That’s where performance-based ratemaking, or PBR, comes in.
PBR is a common-sense utility regulatory framework that ties financial incentives for utilities to measurable performance outcomes, rather than simply allowing recovery of costs plus profit for capital investments. Under PBR, a portion of utility earnings can be tied to how well they perform, not just how much they spend. Regulators set clear, measurable goals—such as affordability, emissions reductions, reliability, customer service, and efficient grid utilization—and utilities are rewarded for meeting or exceeding those outcomes. If a utility finds innovative, lower-cost ways to maintain reliability, integrate clean energy, or reduce peak demand, it can share in the savings. If it falls short, its earnings are reduced.
Suddenly, advanced grid software, energy efficiency, and modern power electronics become business opportunities rather than threats. Utilities would be incentivized to use existing infrastructure more efficiently, avoid unnecessary upgrades, and deploy new technologies that lower total system costs. Importantly, PBR is not anti-utility. In fact, it offers something utilities consistently ask for: clearer incentives and a more stable framework for earning returns in a rapidly changing energy system. But it also ensures that those returns are earned by delivering real value to customers.
The regulator in Connecticut, the Public Utilities Regulatory Authority has worked with numerous stakeholders over the past several years to develop a PBR framework. In July and August, three draft decisions were issued by the Regulatory Authority outlining a strong PBR framework. However, with the changeover of commissioners at PURA, the final decisions have been postponed indefinitely from their anticipated October publication dates.
That draft framework, shaped by numerous stakeholders and PURA staff, would make Connecticut a national leader in utility regulation. The technologies for a more affordable, reliable, and cleaner energy future exist. What we need is a regulatory system that rewards utilities for using them and delivering real benefits to customers. Once the new PURA commissioners have reviewed the relevant materials, they should waste no time in making the PBR decisions final—because those decisions do just what is needed: move Connecticut to a business model that aligns utility incentives with improved customer outcomes.
Will Taylor is the strategy director, Infrastructure and Resilience at Acadia Center and holds a PhD in Environmental Engineering from the University of Connecticut. He resides in Simsbury. Kate McAuliffe is the Senior Policy Advocate for Connecticut at Acadia Center and holds a master of Environmental Management from the Yale School of the Environment. She resides in Avon.
To read the full article from the Hartford Courant, click here.