Traditional “cost-of-service” regulation, where the rate of return is set on rate base, gives utilities incentives to invest in additional infrastructure to increase their own revenues, even when less expensive options are available to meet customers’ needs. The adoption of distributed generation can raise tensions within a traditional cost of service system, because it is seen to reduce utilities’ sales. Performance-based regulation works around this tension, creating a framework in which utilities’ compensation and returns are connected to service goals, targets, and measures. This enhances the grid, gives customers more options, and keeps the utilities financially profitable while facilitating least-cost solutions.
This paper, written to inform the Public Utilities Commission of Ohio’s “Power Forward” inquiry, is intended to examine options for modernizing the electricity grid and improving customer engagement. It explores some of the technological and regulatory innovations that could help Ohio achieve this grid modernization, particularly within the framework of performance-based regulation and alternative approaches to cost recovery and rate design.