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Performance Based Ratemaking (PBR)
Despite gains to consumers from the creation of competitive wholesale power and natural gas markets in the US, many jurisdictions continue to face high costs for electricity relative to nearby regions. These anomalies are forcing regulators to focus on the non-generation portions of customer bills. Increasingly, incentive-based ratemaking is seen as the next step in providing further reductions in delivered energy prices.
Historically, rates for monopoly network industries have been set using cost-plus rate of return regulation. This rate structure has tended to blunt incentives to improve efficiency, since few utilities were actually at risk on any portion of their investment. Incentive based structures provide a mechanism for shareholders and consumers to share gains from efficiency improvements. Rates are set with reference to industry productivity growth targets. Companies that exceed these targets keep a portion of the profits; companies that fail to achieve them can lose money. Targets are reset periodically to insure that incentives remain effective.
Drawing on over a decade of experience in the UK, London Economics is able to provide comprehensive analysis and design of incentive-based regulation mechanisms. Using tools such as data-envelopment analysis (DEA) we are able to normalize and compare utility productivity growth across companies throughout North America and in other jurisdictions. We advise state and Federal regulators on how such mechanisms can be designed; we work with companies required to file tariff proposals in response to regulatory incentive-based initiatives; and we incorporate knowledge of PBR in our valuation of distribution companies for potential acquirers.
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 Regulatory Economics
Performance Based Ratemaking
Electricity Market Design
Unbundling
Market Power
Indicative Work
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