RMI: Virginia has tools for performance-based regulation but design limits incentives

RMI researchers Oliver Tully and Janelle Wilson told the stakeholder group on the Performance-Based Regulation Study that Virginia already uses several mechanisms relevant to PBR but that elements of how those tools are designed limit their effectiveness.

"Multi year rate plans can be more streamlined," said Oliver Tully, who identified himself as a member of RMI's electricity team. He said states moving toward PBR commonly adopt three- to five-year multi-year rate plans (MRPs) that create a ‘‘stay‑out’’ period between rate cases and cap revenues so utilities keep part of any cost savings achieved during the plan term.

The assessment linked several features of Virginia's existing framework to reduced cost‑containment incentives. RMI highlighted the state's two‑year rate cycle, the prevalence of rate adjustment clauses (trackers) that recover costs quickly, and the current statutory cap on the commission's ability to adjust a utility's authorized return on equity (ROE) based on performance. "The 50 basis point limitation may be limiting the commonwealth's ability to incentivize deeper performance improvements," Janelle Wilson said, summarizing her review of statutory ROE adjustment authority.

Why it matters: MRPs can align utilities' incentives with cost containment if revenue caps, attrition relief mechanisms and earning‑sharing mechanisms are designed together. But when many costs are recovered through trackers or reconciliations that guarantee cost recovery, the utility faces little pressure to reduce spending and regulators may not reduce ROE to reflect lower risk.

Key findings and examples cited - Multi-year rate plans: RMI described MRPs as generally three to five years long and noted states and jurisdictions that pair MRPs with strong guardrails, including Hawaii, Massachusetts and Vermont. - Earnings sharing mechanisms (ESMs): Virginia already has an ESM but RMI warned that ESMs reduce utilities' upside from cost savings. RMI recommended designing dead bands and sharing formulas carefully so ESMs do not fully dilute MRP cost‑containment incentives. - Revenue decoupling: Virginia has gas decoupling but not electric decoupling. RMI identified electric decoupling as a ‘‘low‑hanging fruit’’ to remove the disincentive to promote energy efficiency by delinking utility revenue from sales. - Trackers and reconciling mechanisms: Roughly half of utility costs in Virginia are recovered through trackers, RMI said, and warned that frequent trackers can erode cost‑control incentives because they provide rapid, near‑guaranteed recovery. - Management audits and CapEx/Opex equalization: RMI pointed to Hawaii's 2020 management audit — which RMI said revealed about $25,000,000 in annual savings — and to other jurisdictions' practices for aligning O&M and capital treatment to reduce CapEx bias (examples cited: Maryland, New Jersey, United Kingdom approaches).

On setting ROE, RMI said peer benchmarking can be useful but cautioned against relying solely on peer averages, noting states that have reexamined allowed ROE when adopting MRPs (examples given: Illinois and Minnesota). RMI also urged regulators to consider how PBR mechanisms change utilities' risk profiles when setting ROE.

Stakeholder questions and clarifications: Participants asked about comparisons to neighboring states (for example North Carolina) and whether MRPs in high‑price states indicate MRPs cause higher rates; RMI replied that MRPs are not a silver bullet for affordability and that many other region‑specific factors determine prices. RMI reiterated that careful design and complementary tools (decoupling, careful tracker limits, and reporting metrics) are essential.

Ending: RMI said scorecard and reporting metrics can be useful, but recommended that performance targets and incentive amounts be set in advance of the performance period to avoid gaming and to allow utilities to prioritize cost‑effective actions. "Industry best practice is to establish clear targets for a performance incentive mechanism prior to the period of performance," Wilson said.