Massachusetts at a Crossroads: Why Performance-Based Ratemaking is Essential for an Affordable Clean Energy Future
Massachusetts ratepayers face a stark reality: some of the highest energy costs in the nation, forcing families to choose between heating their homes and buying groceries. Meanwhile, our electric utilities continue operating under a century-old regulatory model that rewards infrastructure spending over innovation, a system fundamentally misaligned with the demands of a modern, decarbonized grid.
The Restructuring Utility Incentives Working Group, a coalition of climate and clean energy organizations, recently submitted comprehensive comments to the Massachusetts Department of Public Utilities outlining a transformative path forward. Our message is clear: incremental adjustments won’t suffice. Massachusetts needs bold regulatory reform through Performance-Based Ratemaking (PBR) to ensure affordable, reliable clean energy for all.
The Problem: A System Built for Yesterday’s Grid
Under traditional cost-of-service regulation, electric distribution companies earn profits based on capital investments; the more infrastructure they build, the higher their returns. This “cost-plus” model made sense when we needed rapid grid expansion, but today, it drives utilities toward expensive steel-in-the-ground solutions even when smarter, operational alternatives would better serve communities.
Consider peak demand – the critical hours when electricity use spikes and the grid strains under pressure. Rather than investing in demand reduction strategies that could fundamentally lower costs, utilities default to building new substations and distribution lines. Why? Because they earn returns on capital expenditures, not operational solutions. Every dollar spent on concrete and copper adds to their rate base, while every dollar saved through efficiency or demand response reduces their profits.
This misalignment extends deeper through capital trackers, which were originally designed to help utilities recover unexpected costs, but have become guaranteed cost-recovery tools for discretionary spending, shifting financial risk from utility shareholders to families struggling to pay their bills. When utilities can automatically recover costs, where’s the incentive to manage projects efficiently or seek lower-cost alternatives?
The Solution: Performance-Based Ratemaking That Works
Performance-Based Ratemaking fundamentally restructures utility incentives, aligning profit motives with public interest. Rather than earning returns solely on capital investments, utilities would be rewarded for achieving measurable outcomes: reducing peak demand, accelerating clean energy interconnections, improving reliability in environmental justice communities, and controlling costs.
Our recommendations center on several transformative reforms:
Total Expenditure (Totex) Regulation: Successfully implemented in the UK and Italy, Totex eliminates the artificial distinction between capital and operational spending. Under this framework, utilities manage combined budgets and choose the most cost-effective solutions—whether that’s a battery storage system, demand response program, or traditional infrastructure upgrade. The result? Lower costs, faster innovation, and a grid built for the 21st century.
Peak Demand Reduction Incentives: We propose performance metrics that directly reward megawatt reductions during system peaks, with symmetric rewards and penalties. When utilities successfully flatten demand curves, everyone wins—load forecasts stabilize, capital needs diminish, and future revenue requirements shrink. This virtuous cycle can benefit ratepayers for decades.
Equitable Non-Wire Alternatives: Communities historically burdened by pollution and underinvestment deserve priority access to clean energy solutions. Specific compensation structures for deploying solar and other distributed resources in environmental justice communities ensure the clean energy transition leaves no one behind.
Innovation Frameworks: Massachusetts should establish regulatory sandboxes enabling controlled experimentation with emerging technologies. Connecticut’s Innovative Energy Solutions program provides a proven model for testing new approaches without risking system reliability.
The Stakes: Affordability and Climate Action
The urgency cannot be overstated. Massachusetts has committed to achieving net-zero emissions by 2050, requiring massive electrification of transportation and heating. Under our current regulatory model, this transition threatens to impose crushing costs on ratepayers, particularly low-income families and communities of color already facing disproportionate energy burdens.
But there’s another path. International experience proves that well-designed PBR frameworks can reduce costs while accelerating solar deployment. In the UK, Totex regulation has driven innovation and efficiency gains while maintaining reliability. Italy has seen similar success, demonstrating that regulatory reform isn’t just theory, it’s proven practice.
The Department of Public Utilities now faces a defining choice. Will Massachusetts continue tinkering at the margins while costs spiral and climate goals slip away? Or will we embrace transformative reform that aligns utility business models with the public interest?
Legislative Momentum: The MOSAIC Act Points the Way
The urgency for utility incentive reform has already sparked legislative action. Senate Bill 2270, House Bill 3521, the MOSAIC Act (Maximizing and Optimizing Small-scale Assets in Communities), represents a critical step toward the comprehensive Performance-Based Ratemaking framework Massachusetts needs. This proposed legislation directly addresses several key reforms we’ve outlined.
The MOSAIC Act would require Massachusetts to deploy distributed energy resources, like local solar, equal to at least 20% of total electric load by 2035 – a target that fundamentally challenges the utility preference for centralized infrastructure. By mandating virtual power plant programs that aggregate customer-sited resources for grid services, the bill creates pathways for the non-wire alternatives essential to controlling costs.
Critically, the MOSIAC Act explicitly directs the Department of Public Utilities to “consider the implementation of financial performance-based incentives and penalties” for distributed energy resource interconnection. This provision opens the door to the comprehensive PBR framework Massachusetts desperately needs. When utilities face real consequences for interconnection delays and real rewards for facilitating clean energy deployment, the entire dynamic shifts from obstruction to acceleration.
The bill also prioritizes equity, requiring enhanced incentives for low-to-moderate income communities and environmental justice populations, ensuring the clean energy transition doesn’t leave behind those who need relief from energy burden the most. This isn’t just about technology deployment; it’s about justice.
The MOSAIC Act demonstrates that legislators understand the fundamental problem: our current regulatory structure rewards utilities for building expensive infrastructure rather than optimizing the grid we have. By creating requirements for virtual power plants and distributed resources while opening the door to performance-based incentives, this legislation provides a concrete foundation for broader reform.
If passed, the Department of Public Utilities should view the MOSAIC Act not as an isolated mandate but as a clear signal from the Legislature that comprehensive utility incentive reform is overdue. Its passage would accelerate the transformation from a utility business model that profits from capital spending to one that profits from performance, which is exactly the shift Massachusetts needs.
A Call to Action
The formation of the Restructuring Utility Incentives Working Group reflects growing consensus among advocates, experts, and communities: the status quo is unsustainable. We’re united by a moral conviction that clean energy should be affordable and accessible to all, not a luxury for the few.
Our filing with the DPU provides a roadmap for reform, grounded in technical expertise and international best practices. But technical solutions alone won’t drive change. We need regulators willing to challenge entrenched interests, utilities ready to embrace new business models, and communities demanding accountability.
Massachusetts has always led on climate action. Now we must lead on regulatory innovation, proving that environmental progress and affordability aren’t opposing goals, they’re complementary outcomes of smart policy design.
The path forward is clear. The question is whether we’ll have the courage to take it.