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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. Incentives are coupled with performance standards to guard against a deterioration in customer experience as utilities seek efficiency gains. Targets are reset periodically to ensure that incentives remain effective.
For companies facing a performance-based ratemaking (PBR) regime, or regulators exploring one, we help to quantify the potential revenue at risk and the compensating possibility for upside, examine issues such as performance standards, cost of capital, customer impact, and social protections, and provide support on regulatory filings.
Drawing on a wealth of international experience, LEI is able to provide comprehensive analysis and design of incentive-based regulation mechanisms. Using tools such as data envelopment analysis (DEA) or other appropriate techniques, 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 performance-based ratemaking (PBR) in our valuation of distribution companies for potential acquirers.
London Economics International, LLC uses its proprietary models to forecast electricity and natural gas prices. For electricity markets, models of merit order dispatch and of bidding strategy enable LEI to provide a variety of energy and capacity price forecasting services. LEI has augmented its suite of models to provide insights on battery storage as well. Our natural gas pipeline models assess basis differentials and the cost of new pipelines to determine potential future delivered natural gas prices.
LEI’s extensive modeling experience in markets across North and South America, as well as overseas, enables us to respond quickly to the needs of our clients. We provide off-the-shelf forecasts of key North American markets, which can be customized to meet client needs. Furthermore, LEI can provide modeling for almost any wholesale produce market worldwide. Depending on the level of customization required, we generally provide basic price forecasts for key markets in 2–3 weeks. Our involvement is often more far-reaching: we work with clients from the initial bid stage through to final financing. This can entail assisting in board presentations, writing portions of the offering memorandum, and supporting the client in presentations to rating agencies.