It is time for jurisdictions serious about moving to a new utility model to transition from a rate-of-return structure to direct performance regulation. It will help utilities move to cleaner energy, energy efficiency, and their corollaries: customer-friendly and environmentally responsible service. Decoupling has reduced some barriers to pursuing efficiency, combined heat and power (CHP), and net metering. Although efficiency programs generally operate under some form of separate regulated performance structure, utilities still operate under traditional capital asset cost recovery regulation. As technologies and customer needs change, distribution utilities need to integrate new distributed resources into their supply mix by working in transparent partnership with customers and markets. This seismic shift will require a break from older models. It will require clear articulation of policy objectives by legislative and regulatory leaders, an active partnership in implementing, and an active learning process to translate those objectives into indicators that guide strong performance.

The authors outline a process that can help effect an intelligent transition. They address necessary preconditions for bringing it about. They discuss three essential tiers of utility performance incentives: (1) “guiding” incentives that set long-term goals and foster integration and coordination of services; (2) “directional” incentives, correlated to the guiding incentives, and (3) “operational” incentives, to assure customer service and reliability. The paper proposes three potential guiding incentives. It discusses how directional incentives could accelerate new capacity building for utilities, and how operational incentives can progressively improve customer service. High performance can result in increased utility effective rates of return.