Performance-Based Ratemaking: Utilities Should Be Held Accountable for Results, Not Just Investments

For decades, the basic utility business model has remained the same: utilities invest in infrastructure, earn a return on those investments, and recover the costs from customers through set energy rates. 

But the energy system is changing rapidly. Electricity demand is rising, extreme heat is putting new pressure on the grid, much of the country’s infrastructure is aging, and customers are facing an affordability crisis. At the same time, utilities are proposing billions of dollars in new investments to meet these challenges— which customers ultimately pay for. 

All of this raises important questions: What exactly are customers paying utilities to deliver, and how do we hold them accountable for delivering it? 

Performance-based Ratemaking Could Play a Critical Role in Solving This Puzzle

When you’re up for a promotion at work, your performance is usually judged by the results you deliver. Normally, we expect rewards to follow results. Utilities have historically worked differently. Rather than tying utility revenue and incentives primarily to the amount of infrastructure a utility builds or the money it spends, performance-based ratemaking can connect those incentives more directly to the outcomes that matter to communities. Those outcomes can include reliability, affordability, and how effectively utilities make use of the grid and resources they already have. 

As customers are asked to pay for billions in new infrastructure, performance-based ratemaking offers a way to hold utilities accountable for what they build and for what customers get in return. This shift is already happening in states across the country: 

In Michigan, the Michigan Public Service Commission recently released a proposal that would reward or penalize utilities based on how well they perform for customers by holding them accountable for how quickly they connect and make use of community-powered energy resources already in homes and communities, like solar, batteries, and electric vehicles, and how well they make use of the energy grid they already have. 

This approach signals a broader shift in how we think about utility regulation. Instead of only asking whether utilities are making the investments they say they need, regulators can also ask whether those investments and the grid are delivering meaningful results for customers. 

In Connecticut, the state’s performance-based ratemaking docket came as a directive from legislation passed after major storms caused prolonged power outages. The proceeding is currently at a standstill, with decisions pending. However, the framework is expected to more directly tie utility performance and revenue to outcomes for customers.

In Oregon, similar to Connecticut, legislation is calling the PUC to investigate, develop, and adopt a framework for performance-based ratemaking, adding to the growing number of states considering how to better align utility incentives with customer needs. 

While details of performance-based ratemaking vary state to state, the underlying theme remains the same: utilities should be held accountable for the value of the service they provide to customers. 

The need to reform the utility business model is becoming increasingly urgent as customers are being asked to fund billions of dollars in new infrastructure. 

Performance-based ratemaking isn’t about eliminating new investments; it’s about making sure those investments are made in the interest of communities that ultimately pay for it, bringing fewer and shorter power outages, affordable energy bills, a grid that supports solar and other clean energy resources, and a system that makes use of the resources it already has. Performance-based ratemaking can help make those outcomes part of the regulatory equation. 

A performance-based approach can help ensure that the answer isn’t simply more infrastructure, but better outcomes: a more reliable, affordable, and clean energy system.As more states consider how to update their utility regulation, performance-based ratemaking offers an opportunity to rethink the relationship between utility investments, utility revenue, and customer satisfaction.