Is North Carolina Moving Toward 21st Century Ratemaking?
- Jul 8, 2021 5:08 pm GMT
A long-anticipated energy bill unveiled in North Carolina, House Bill 951, aims to modernize the state’s energy sector and reduce carbon emissions by more than 60% by 2030. Much of the reaction to the bill centers on whether the state’s coal fleet will retire fast enough and, whether Governor Cooper’s plan for North Carolina to be carbon neutral by mid-century is consistent with what some claim is the bill’s endorsement of new natural gas generation. These are fair and legitimate questions. Yet there are other important, albeit “wonkier”, provisions that merit close attention.
House Bill 951 would have North Carolina join a number of other leading states by authorizing “Performance Based Regulation” (PBR). Unlike, for example, the debate over how to manage the costs that are inevitable for a statewide clean energy transition, PBR is designed to both save ratepayers’ money and accelerate a clean energy transition. Under traditional utility regulation (read: not “performance based”), regulators approve both the rates at which utilities sell electricity and capital expenditures, which the utilities can then recover from ratepayers along with a profit margin. In essence, utilities make money by spending money. This traditional regulatory model was designed a century ago to incentivize the construction of the electric grid and to ensure reliable service to all customers. And it worked. Today nearly everyone is connected to a grid that provides among the most reliable service in the world at relatively low costs.
PBR is about now applying a 21st Century approach to meet 21st Century needs, including cleaner sources of energy, the use of energy efficiency and other grid technologies that save consumers money and improve service, an even more resilient grid to withstand increasingly severe weather, and the use of “distributed generation” (like rooftop solar). PBR is about compensating utilities for achieving such outcomes (determined through transparent and consensus-building processes) and not just compensating utilities based on how much electricity they sell and how much money they spend. Done right, PBR can deliver the outcomes we desire, protect consumers from unnecessary rate increases, and ensure that utilities are fairly compensated for the value they deliver.
The North Carolina bill includes several key components of PBR: revenue “decoupling”, multi-year rate plans (MYRPs), and performance incentive mechanisms (PIMs). Revenue decoupling breaks the legacy link between how much electricity utilities sell and how much money they make. Consumers only want to buy as much energy as they need, and with advanced energy efficiency and their own energy production through distributed generation, they may need to buy less from the utility. This only works for utilities if their revenue is “decoupled” from the amount of electricity they sell. With decoupling, the incentives of power companies better align with the interests of their customers.
MYRPs change the current practice of frequent rate case adjudication and better align utility revenue needs with the provision of desired services and outcomes. Today, because of greater efficiency, self-generation, and structural changes to our economy utilities are seeing declining electricity demand. With a business model based on sales volume, this often leads to utilities seeking higher rates to compensate for reduced sales. These rate cases are time-consuming, expensive, and expose consumers more frequently to potential rate increases. With MYRPs, utilities are given multi-year revenue plans based on forecasted market factors and desired outcomes. Utilities are then incentivized to earn their target revenues at the lowest possible cost and are spared the high costs of frequent rate cases. In theory, it is a win-win for both consumers and utilities.
PIMs complement MYRPs and revenue decoupling by aligning utility investments with objectives developed on a consensus basis with customers and regulators. Utilities can then create programs and services to meet those goals. They are rewarded when they succeed and penalized when they fail. PIMs can target a host of desired outcomes, including grid modernization, reduced pollution, energy efficiency improvements, or more distributed clean energy.
If policymakers are serious about reducing carbon emissions and modernizing the grid, they need to be serious about bringing the North Carolina regulatory construct into the 21st Century. Yes, there are a host of devils lurking in the details of PBR. But done right, utilities will be profitable, consumers will save money, the grid will be more resilient, and the environment will be cleaner. Sure seems like that’s a lot that North Carolinians can agree on.
Roger Ballentine is the President of Green Strategies Inc. and former White House Energy and Climate Change advisor to President Bill Clinton.