Review of Performance-Based Ratemaking Plans for U.S. Gas Distribution Companies

Performance-Based Ratemaking (PBR) is receiving increasing attention by energy utilities and their regulators. PBR is the industry term for forms of regulation that increase financial incentive for performance relative to traditional cost-of-service/rate-of-return (COS/ROR) regulation. In this report, PBR plans filed by US gas local distribution companies (LDCs) are described and reviewed. The rationale behind energy utility PBR is presented and discussed. Using nine plans that have been proposed by eight LDCs as a basis, a framework (typology) to facilitate understanding of gas utility PBR is presented. Plans are categorized according to the range of services covered by the PBR mechanism and the scope of the mechanism`s cost coverage within a service category. Pivotal design issues are identified and, based on the sample of plans, observations are made. Design issues covered include the length of time that the PBR is in effect (term); the relationship between PBR plans and status quo ratemaking; methods for formulating cost or rate indices, earnings sharing mechanisms, and service quality indices; and compatibility with gas utility DSM programs. The report summarizes observations that may be considered supportive of the rationale behind PBR. PBR is, however, not clearly superior to traditional regulation and few PBRs that are broad in scope have been adopted long enough to allow for a empirical analysis. Thus, the report concludes by identifying and describing commonly-cited pitfalls of PBR.