Enabling Utility Regulation With a Modern Data Architecture

As more utilities move to modern regulatory frameworks, data can be used to track performance and make more informed decisions.

Dec. 17, 2024 | By Marc Smith

As many states work toward decarbonization efforts, investor-owned utilities face the challenge of investing in smart grids that support renewable, distributed energy resources. At the same time, these companies must still ensure a return on shareholder investments.

Traditional cost-based ratemaking fails to generate the necessary capital investments to modernize the grid and support distributed energy resources at the required pace. Fortunately, modern regulatory frameworks provide the incentives for investor-owned utilities to invest at scale to provide clean, reliable and affordable energy. These investments also usher in data transparency and data architecture modernization. The result: rich operational network data generated through grid modernizations, which can help optimize the network and prioritize investments in the grid.

Implementing a modern data architecture isn’t a simple process. It needs a data strategy and proper governance to ensure effective data management so this valuable resource can be treated as a strategic asset. Before we cover data modernization, let’s first look at the regulatory frameworks that enable the investments to modernize the grid.

Adaption to a Modern Regulatory Framework

Globally, many utilities are transitioning from predominately centralized fossil fuel-based generation systems to clean energy to meet new renewable portfolio standards. Many emerging technologies—including the electrification of more products—drive this transition, including distributed energy resources (DER) such as photovoltaic (PV), long-term battery storage, electric vehicles and smart grid technologies.

Given the magnitude of this transition—and the capital to support it—public utility commissions are modernizing their regulatory frameworks. This provides incentives for utilities to make the investments to modernize the grid while ensuring safe, reliable, affordable and clean energy that customers want.

The Shift to Performance-Based Regulation (PBR)

The move to modern regulatory frameworks is essential as jurisdictions strive to meet their renewable requirements and goals. But under traditional cost-of-service regulation (COSR), individuals have to pay significant rate increases to cover the costs of transitioning the grid from fossil fuels to renewables. There are no real mechanisms under COSR for the utility to make investments in modernization at this scale while also maintaining the financial returns shareholders expect.

Performance-based regulation (PBR) is a framework that allows investor-owned utilities to act in the best interests of their shareholders (e.g., maximizing financial returns) while meeting state goals that generally focus on safe, reliable, affordable and clean energy. PBR enables:

• Efficient investment and allocation of resources (both capital and operations management)
• Greater cost control and reduced rate volatility
• Increased customer choice through varying energy programs
• New revenues from the sale of nontraditional products and services
• Fair distribution of risks between utilities and customers
• Fulfillment of public policy goals

How PBR Is Different From COSR

COSR usually caps earnings, whereas PBR uses an indexed revenue cap, meaning the maximum-permissible revenue is linked to an external price index. In addition, a well-designed PBR plan should hold the firm financially responsible for performance areas it controls and not those it can’t control.

Most, if not all, incentive regulation plans incorporate some type of service quality benchmarks that drive the desired outcome for the energy transition. PBR tends to use multiyear rate plans (MRPs) to provide greater revenue certainty to support long-term capital projects.

Results Tracked With Performance Incentive Mechanisms (PIMs)

Performance incentive mechanisms (PIMs) are a component of a PBR framework. They adopt specific performance metrics, targets or incentives to impact desired utility performance. PIMs can even lead to increased revenue around an authorized rate of return, resulting in stronger performance in specific target areas.

These metrics layer on top of many traditional outcomes in utility regulations, such as service reliability, SAIFI and SAIDI. Newer outcomes include those areas that require more attention as a state’s electricity system shifts to more renewables and as utilities pursue opportunities for nontraditional asset investments and services.

In the chart below are some common examples of emergent PIMs and their outcomes.

PIM	Outcome
Distributed Energy Resources (DER) Grid Services	DER asset effectiveness and grid investment efficiency through incentivizing the acquisition and utilization of grid service capabilities. Includes fast frequency response (FFR), load build and/or load reduction on utility infrastructure from demand-side resources to meet grid needs.
Renewable Portfolio Standards	Achievement of Renewable Portfolio Standards goals, promoting the outcomes of DER asset effectiveness to produce a specified amount of electricity from renewable energy sources.
Advanced Metering Infrastructure (AMI) Utilization	Accelerated number of customers with advanced meters enabled to support time-varying rates and next-generation DER programs. Use of AMI internal data for renewable program effectiveness.
Renewable Generation and Non-Wires Alternatives	Competitively procured, utility-scale, low-priced, renewable energy. A shared saving mechanism to incentivize competitive procurement of grid services from non-wires alternatives (NWAs), such as solar, wind, energy storage and microgrids.

A Look Into the Future With PBR Frameworks

Modernization is more than a buzzword—it’s an essential component of maintaining a successful, thriving enterprise in any industry, including utilities and energy. PBR frameworks can help incentivize investor-owned utilities to reach decarbonization goals and take advantage of valuable data to make key decisions for both stakeholders and customers.

In Part 2 of our series, we’ll dive deeper into PBR and how a modern data architecture can play an integral role in utilities, providing transparency and key insights.