What are the components of a typical performance based formula?

PBR regimes are not just about selecting an inflation parameter and productivity factor. PBR mechanisms need to include a comprehensive set of components in order to fully address regulation. Overall, the PBR formula needs to be viewed holistically – parameter choices cannot be made independently of one another.
Price / revenue cap =
Going-in rates: starting point of the PBR regulatory term. Rates usually determined through a COS filing (or rebasing). The PBR annual adjustment (I – X) is subsequently applied to those rates during the regulatory period.
Inflation (I) factor: annual adjustment to the utility’s revenue or rates reflecting the level of inflation, usually reflecting the actual inflation rate in the previous year.
Productivity (X) target: annual adjustment to revenue or rates reflecting expected changes in terms of productivity. May be based on the utility’s historical performance or an external benchmark. May include a firm-specific target, or stretch factor.
Capex (K) factor: annual adjustment to the utility’s revenue or rates reflecting forecasted capex needs or ex post approval of capex spending in the previous year.
Performance standards (Q) factor: contingent adjustment to revenue or rates for rewards/penalties linked to the achievement or failure to reach specified performance targets, usually in terms of service quality, as well as reliability and quality of supply.
Going-in
rates
{ Inflation
(I) factor
Productivity
(X) target
}
+ Capex
(K)
factor
+ Performance
standards (Q)
factor

+ ESM + Unforeseen
events (Z)
factor
+ Flow
through

Earnings sharing mechanism: mechanism through which a specified portion of a utility’s profits in excess of/below the approved return on equity/forecasted level of expenditures is returned to customers.
Unforeseen events (Z) factor: contingent adjustment to revenue or rates in order to recover extraordinary costs that are outside of the company’s ability to control or predict, usually above a materiality threshold.
Flow-through factor: contingent adjustment to revenue or rates reflecting certain pre-approved costs that are automatically passed through to customers as they arise, without having to be approved by the regulator.
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