Minnesota Moves Forward with Performance-Based Regulation Process

Last week, the Minnesota Public Utilities Commission decided unanimously to begin exploring performance metrics for the state’s largest utility, Xcel Energy. The decision is a major step towards achieving one of the critical goals set forth by the e21 Initiative’s diverse stakeholder group in 2014 – to better align the regulatory incentives that utilities face with achieving an agreed-upon set of performance outcomes that the public and customers want.

As part of the decision at the hearing on November 1st, 2018, the Commission established the goals and desired outcomes of utility regulation and will initiate both informal stakeholder workshops and a formal comment/reply process to identify metrics that would indicate progress on those outcomes. The Commission also established a set of design principles to guide the development of those metrics, which are similar to the principles developed in the e21 Phase II white paper on performance regulation. The Commission’s order designates the Great Plains institute, co-convener of the e21 Initiative, as the third-party facilitator for stakeholder engagement and workshops to supplement the formal comment/reply process. Unlike GPI, the Center for Energy and Environment, the other co-convener of e21, is a party to the docket and provided written and oral testimony to the Commission.

Part of the discussion at Thursday’s hearing centered on whether such a process is needed if Xcel Energy is essentially providing what customers and regulators want, including affordable rates, a strong track record of service quality, a commitment to 80% carbon reductions by 2030, and several renewable energy options for customers. Ultimately all parties, including Xcel Energy, supported the rigorous and step-wise Performance Incentive Mechanism or “PIM” Process proposed by the Minnesota Attorney General’s Office.  This model was developed by Synapse Energy Economics and was also an important foundation for stakeholder recommendations in the e21 Phase II white paper on performance regulation.  The process begins by establishing the goals and desired outcomes of utility regulation. Those outcomes then inform the development of metrics by which utility performance can be judged and that can be summarized in a public-facing dashboard. Eventually, performance on those metrics can be used to identify areas where the utility business model may not be well aligned to provide certain outcomes that are in the public interest.

Minnesota is among several other states including Hawaii, Michigan, New York, Oregon, and Rhode Island that are formally taking action to evaluate alignment between the utility business model and the public interest. The PIM Process adopted by the Minnesota PUC last week was originally proposed by the MN Attorney General’s Office earlier this year and informed the proceeding in Hawaii, which is also evaluating regulatory goals, outcomes, and metrics to identify alignment between the utility business model and the public interest.

The Minnesota process will be moving forward with stakeholder engagement workshops and comment periods to help the Commission establish performance metrics that indicate progress on the outcomes and that comply with the metric design principles established last Thursday.

While the final written order from last week’s hearing is forthcoming in Docket 17-401, we have captured the draft goals, outcomes, and metric design principles below:

Regulatory Goals:

The goals in overseeing the rates, investments, and returns made by the investor-owned utilities in Minnesota are to promote the public interest by ensuring adequate, efficient, and reasonable service, reasonable rates, the opportunity for regulated entities to receive a fair and reasonable return on their investments, and environmental protection.

Categories of Performance Relevant to the Goals:

1. Customer Focus
2. Utility Performance
3. Public Policy

Desired Regulatory Outcomes:

1. Affordability
2. Reliability including both customer and system-wide perspectives
3. Customer service quality including engagement and empowerment
4. Environmental performance including carbon reductions and beneficial electrification
5. Cost effective alignment of generation and load, including demand response

Metric Design Principles:

1. Tied to the policy goal. A metric should clearly reflect whether or not the underlying policy goal is being met. That is, it should seek and evaluate data that is specifically tied to the particular policy goal underlying the metric.
2. Clearly defined. The method of calculating a metric should be precise and unambiguous in order to enable meaningful comparisons and to reduce potential disputes.
3. Able to be quantified using reasonably available data. Using already reported data or data that is readily available will reduce administrative burden and the costs associated with implementing the metric.
4. Sufficiently objective and free from external influences. Metrics should seek to measure behaviors that are within a utility’s control and free from exogenous influences, such as weather or market forces.
5. Easily interpreted. Metrics should exclude the effects of factors outside a utility’s control so they provide a better understanding of utility performance and should use measurement units that facilitate comparisons across time and utilities (i.e., “per KWh” or “per customer”)
6. Easily verified. Straight-forward data collection and analysis techniques should be used, and independent third-party evaluators can further ensure accurate verification with respect to performance metrics.
7. Should complement and inform evaluation of utility performance. Performance metric systems should be designed to complement – not replace – other parts of a utility’s regulatory system such as MYRPs and cost trackers.

This decision by the Minnesota Commission is one of several impacts on the evolution of utility regulation in Minnesota that align with past recommendations of the e21 Initiative, which include the establishment of grid modernization and distribution planning processes, updating Minnesota’s distribution interconnection standards, the development of advanced rate designs for the state’s investor-owned utilities, and a Commission investigation into electrifying transportation.

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