Performance-based regulation (PBR) enables regulators to reform 100-year-old regulatory structures to unleash innovations within 21st century power systems. Our current electric system is built upon an old regulatory paradigm that ensured safe and reliable electricity at reasonable prices from capital-intensive electricity monopolies. Today, disruptive technologies are changing the way we interact with the electric grid, and how electricity is generated, delivered, and consumed. Residential customers are increasingly able to control their energy usage and even become grid resources, something not contemplated in the 20th century era of large, centrally operated generating plants. There are new energy capabilities throughout the power sector, ranging from traditional centralized power generation and transmission to customer-sited generation.

The ongoing transformation to a more efficient and more complex grid means that utlities’ business models are changing too. Some utilities are being challenged as they face less demand for electricity sales, and all are facing increasing demands for new services and uses of their systems. With this transformation, utilities worldwide are increasingly finding themselves delivering value to customers with different needs, who want to use electricity in different ways and sometimes offer value back to the utilities.

Performance-based regulation is a tool that regulators can use to bridge the gap between an old regulatory paradigm and the new challenges and opportunities provided by emerging technologies and changing values. It provides a regulatory framework to connect goals, targets, and measures to utility performance, executive compensation, and investor returns. This paper provides successful examples of PBR worldwide, drawing valuable lessons learned from varied jurisdictions. It also provides design considerations and options for crafting PBR or performance incentive mechanisms (PIMs). PBR is being used in a multitude of jurisdictions, and the report highlights innovative theoretical ways PBR could be applied, as well as unique mechanisms already in place around the world.

This paper was also published in a three-volume series.