What are the general steps involved in implementing a performance based regime?

Moving from a traditional COS regime to PBR can be an intimidating task for both the regulator and the utility. It involves a significant amount of regulatory work and requires lengthy stakeholdering efforts to determine the appropriate PBR mechanism to implement and to allow more in-depth analysis of sectoral and technical issues, discussions of which are not always present or as thoroughly dissected during a COS deliberation.

PBR Implementation steps:

Regulator or utility initiates the process by expressing intent to shift to PBR

Regulator clarifies principles to guide development of the new regime

Utilities submit PBR proposals

Workshops held to solicit stakeholder feedback on proposals

Regulator evaluates PBR proposals, considering stakeholder and expert input

The appropriate PBR approach is chosen, and implementation begins

When transitioning to a PBR regime, the following major stages need to occur:

  • The first “formal” stage in the PBR process is when the regulator (or sometimes, the utility) expresses its intent to implement a shift. At this stage, the regulator is expected to explain the objectives clearly to all stakeholders as it embarks on the process. Experience and best practices dictate that the shift to a PBR mechanism requires establishing principles that should guide the stakeholders (particularly the utility) in the development and implementation process. The principles will assist the regulator in the evaluation of and deliberation on the PBR proposals. Such principles should also guide the utility in developing the most responsive and relevant proposals.

  • The move to PBR may also involve hiring an economic consultant to assist in determining the appropriate PBR approach, identifying the appropriate components for PBR (such as incentives and magnitude of rewards or penalties for the performance standards), reviewing what data is currently available, or providing a study of historical and forecasts of inflation and productivity trends. It is also crucial that the regulator communicate regularly with stakeholders, to ensure they are on the same level of understanding. Workshops and technical conferences are generally conducted to familiarize stakeholders with the proposed PBR approach and to solicit feedback.

  • Lastly, data availability is a critical element in the development of a PBR regime and will improve the functionality of PBR regulation over time. The need for good data cannot be understated; incentive design could be significantly weakened by poor data. More “comprehensive” forms of PBR require collating and employing multi-period information and data samples covering multiple firms. Over time, availability of reliable, comparable, and accurate data for the industry as a whole and the utilization of “best practice” forecasting tools can improve the functionality of the PBR process, thereby facilitating analysis and negotiations of parameters for PBR factors, as well as benchmarking actual productivity achieved against prior targets.
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