e21 Phase 2 Report: Perfomance Based Compensation Framework
A central recommendation of the e21 Initiative Phase I Report is the shift to a more performance-based compensation framework, where some portion of the utility earnings is linked to utilities’ performance on outcomes valued by customers and supportive of state energy policies. This shift would require updating the manner in which Minnesota regulates utilities in two fundamental ways. As noted above, it would accomplish the following:
- Shift away from a business model that provides customers few options (everyone gets the same grid electricity produced largely with coal, natural gas, or nuclear power at large central stations) toward one that offers customers more options in how and where their energy is produced and how and when they use it, while maintaining fair and competitive pricing, reliability, and minimal environmental impacts
- Shift away from a regulatory system that rewards the sale of electricity and building large, capital-intensive power plants and other facilities toward one that reasonably compensates utilities for achieving an agreed-upon set of performance outcomes that the public and customers want
As envisioned in phase I of e21’s process, this shift is intended to achieve four core objectives:
- Utilities become indifferent to how a particular system need is met (e.g., large central generation or distributed generation) and by whom (utility or non-utility). Utilities would evaluate all options and pursue non-utility solutions when they are more cost-effective.
- Real costs for electricity decline over the long term as utilities and customers are incentivized to make choices that optimize the alignment between generation and load to better utilize the existing system.
- Financial incentives (positive or negative) drive utility performance. High-performing utilities may earn more than their costs would indicate, and utilities that do not meet performance outcomes may earn less.
- A more customer-centric framework that meets growing customer expectations regarding service, product, and technology options and includes affordable services to low-income customers
Through the discussions in phase II, however, it became clear that there are diverging views as to how quickly and how extensively the shift should take place, even though there was agreement among participants that there is value in moving toward a more performance-based model. A sudden and untested shift away from the current risk-reward relationship could potentially have an adverse impact on utilities’ ability to make necessary cost-effective investments in the electric system. Similarly, waiting too long to act could be detrimental. As a result, e21’s white paper Performance-based Compensation Framework delineates principles, guidelines, potential outcomes, and metrics to support an incremental movement toward a more performance-based model, but does not choose among three identified stages or recommend specifically where Minnesota’s regulatory framework should settle.
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