Ahead of the Curve: How Public Power’s Performance Standards Set the Bar for IOUs

Operating at cost.
Prizing customer satisfaction.
Incentivizing energy efficiency.

In over 16 years in the electric cooperative industry, I wrote those phrases hundreds — if not thousands — of times. They are integral to the public power business model, baked into not just how we operate but who we are.

A burgeoning concept for oversight of investor-owned utilities called performance-based regulation (PBR) has an awful lot in common with how public utilities do business every day.

In a recent episode of the Volts podcast, “Tying utility profits to actually doing a good job,” host David Roberts laments that the regulatory framework for investor-owned utilities is woefully outdated.

“The financial incentives of investor-owned power utilities are not well aligned with our aspirations for a climate-friendly electricity system,” he said on a recent podcast. “The regulatory structure that currently governs utilities was designed for growth and speed; utilities make more money by selling more power and making big new infrastructure investments upon which they receive a guaranteed rate of return.”

Meanwhile, non-revenue-producing activities like operational maintenance, customer service, and energy efficiency programs are a secondary priority, if they even make it that high on the list. Roberts argues that the only way to change the priorities is to change the incentives, and the only way to do that is through a new regulatory framework.

“Enter performance-based regulation. PBR can get complicated in practice, but the basic idea is simple: it just means that utilities should profit (or not) based on how well they perform … like every other business in a capitalist economy,” Roberts said. “There is a broad set of tools available to regulators, but in all cases the goal of PBR is to align utility incentives with modern needs like resilience, equity, customer satisfaction, or carbon intensity.”

Roberts invited two experts on PBR to get into the weeds for his listeners. As they discussed the basics of potential frameworks, including incentives and penalties, much of the desired outcomes and focuses sounded a lot like how most electric cooperatives, even those in states where they’re regulated by a commission, operate as a rule.

For example, Cara Goldenberg of RMI’s electricity practice described “decoupling” as what is often the first step to a PBR framework. It removes a utility’s incentive to sell more power to make more money — just as a public power utilities are not incentivized to seek greater sales or greater profits.

“I think that is one of the most important objectives of PBR, is to actually incentivize cost efficiency, to make sure that utilities actually have skin in the game and can benefit from reducing their costs and delivering a more efficient system,” she said.

She also described earnings-sharing mechanisms that split cost savings between customers and shareholders. Cooperatives, of course, bypass the complication by assigning capital credits, and many have modified their practices to accommodate newer members with the so-called “first in, first out” method, so members don’t have to wait as long for their returns.

A third component revolves around metrics and scorecards. Rather than simply incentivizing or penalizing under a new framework or, as in traditional regulations, compensating for building without further accountability, these programs track and report utilities’ performance for the public. Goldenberg described Hawaii Electric’s public dashboard as the current best practice.

I couldn’t help but think of the many public utilities I know of that regularly, sometimes even monthly, report on their metrics like line loss, outage time, and investments in regular maintenance. Again — it’s just how we do business and take care of our communities.

“There really could be situations where it’s a win-win-win,” Goldenberg said. “Where the utility is, you know, financially stable and able to provide reliable, affordable service. Customers are paying just what they need to, right? And are getting the programs that they need and are being supported.”

“And utilities might actually be paying attention to whether customers are satisfied and happy or not,” Roberts added. “This is a novel new thing for utilities.”

Not for cooperatives!

While the public power business model was never mentioned in the course of the discussion, it certainly seems like many of those practices fit what modern policy and regulatory analysts consider to be the right way of doing business in the electric utility industry.

For years, many of us have had a philosophical debate about what exactly is “the cooperative difference” and how to boil it down to a concise message. Perhaps experts outside of our insular industry can recognize it best.