At the direction of the General Assembly, Connecticut’s Public Utilities Regulatory Authority has been at the forefront of innovation, overseeing a comprehensive analysis of a Performance-Based Regulation (PBR) framework for our electric utilities.
PBR 一 a modern approach to regulating utilities that moves beyond outdated policies一 is designed to ensure utilities are responsive to public policy priorities and are operating most efficiently on behalf of customers.
This approach makes the utilities partners in reducing costs and can accelerate the achievement of Connecticut’s environmental and climate goals by supporting a clean and affordable energy system. Connecticut is not unique in examining the potential of PBR to improve utility performance. Several jurisdictions around the country have adopted this model, and others are looking to Connecticut’s proceeding as a potential model for their own efforts. We commend PURA for its leadership in moving PBR forward in Connecticut.
Under traditional utility regulation, utilities make money by getting a guaranteed rate of return (as high as 10% in the Northeast) on capital expenses such as poles, wires, and substations. This made sense when the electric grid was brand new and needed to expand rapidly in order to bring electricity to millions of homes. Today, with a mature and technologically sophisticated electricity grid, this approach no longer serves customers.
More efficient solutions like non-wires alternatives such as energy storage, demand response, and distributed solar generation, do not provide an additional rate of return (i.e. earn extra money), so utilities have a clear incentive to continue building and upgrading their infrastructure in a traditional way 一which can end up more financially attractive for the utility but more expensive for customers. Simply put, under traditional regulation, utilities need to spend money in order to earn money.
At the same time, utility performance is traditionally measured using a limited set of metrics around safety and reliability, with little consideration of customer satisfaction or how well the utility is planning for the inevitable clean energy transition. This incentivizes utilities to play it safe when planning for the future, erring on the side of overestimating demand growth, underestimating distributed energy resources, and underutilizing non-capital solutions 一 all of which leads to customers footing the bill for an overbuilt energy system.
Very little progress in innovation in utility compensation has been made. Utilities are still operating under a framework that was established at the turn of the 20th century.
Utilities in Connecticut need to be encouraged financially to align their actions and business decisions with the state’s policy goals 一 such as reducing greenhouse gas emissions, protecting customers, and promoting environmental justice. Performance-Based Regulation ties utility earnings more directly to their performance, such as reducing ratepayer costs and emissions or supporting the deployment of distributed energy resources. By advancing a PBR framework, PURA is helping to realize these goals and is establishing Connecticut as a leader.
By allowing regulators to better align utility revenues with improved performance, PBR can help overcome outdated incentives and reorient utilities towards solutions that can save customers money and deliver additional benefits compared to traditional investments, including electric system resilience in the wake of recent post-storm power restoration challenges.
PURA has expressed a commitment to exploring a broad set of potential regulatory tools to support the PBR goals that stakeholders agreed to as part of the proceeding: improving utility operational performance; supporting public policy goals; empowering customers; and enabling reasonable, equitable, and affordable rates.
Throughout the proceeding, however, the utilities have consistently expressed skepticism and raised fears that PBR will jeopardize their businesses. These concerns are unsupported and are a distraction from the overdue effort of modernizing utility regulation for a meaningful and positive impact for customers. Rhode Island, Massachusetts, and New York have already employed performance incentive mechanisms and other PBR tools. Now, Connecticut has the opportunity to go beyond those states and demonstrate the full potential of PBR to the rest of the country.
Since taking the reins at PURA in 2019, Chair Marissa Gillett has overseen an impressive suite of regulatory dockets designed to improve the utilities’ distribution system planning and establish greater responsiveness and public transparency. PURA’s Equitable Modern Grid proceedings have established a framework to advance energy affordability, improve grid resilience and reliability, and support the cost-effective transition to a decarbonized future. PBR is important for establishing a firm foundation upon which these transformative initiatives can continue to flourish. Rather than stick to the status quo, Chair Gillet has embraced the challenge of evolving the regulatory space to meet the needs of today. Her leadership is helping Connecticut succeed in achieving the ambitious and imperative energy goals that will take us to a cleaner, more just future.
Utility shareholders cannot continue to dominate the conversation about Connecticut’s climate and clean energy future. The role that utilities play in advancing the public policy goals established by the legislature must evolve so that they no longer create barriers to a clean energy transition, but act as true partners in enabling a healthier and more affordable future. We applaud PURA for its efforts in making this vision a reality.