“Principle-based regulation,” or, regulate business based on goals for the public. “Smart regulation” is another label.
It means to regulate with head and heart, not by bureaucratic mandates. Regulate with knowledge of what it takes to reach a business or institutional goal, what a balance sheet means, and with an understanding of technology.
While the concept is about businesses of all kinds, it is tough not to think about the evolving power industry business model. The power industry is changing and perhaps that requires a good look at regulation, too.
Electric industry regulation has been largely based on a cost-of-service model, noted with the abbreviation, COSR. Customer demand has been the basis of the price, plus a profit for the power organization. Regulators approve rates for companies based on demand and determine what rate of return the company can earn.
In a world that values reducing the use of electricity and carbon emissions, but still requires new infrastructure investment, that model falls short. Money does not come in for needed improvements if less product is sold.
The power industry needs major infrastructure as new power generation sources are created and transmission systems need to be upgraded. Technology is advancing fast. Customer expectations are rising, too.
One alternative is called Performance-based Regulation, PBR. This kind of regulation is a shift in mindset for traditional utilities. It sets revenues based on reaching certain goals, not on higher volume. Those goals can be, for instance, adding non-carbon generation or improving digitization of the local grid.
COSR and PBR can be combined, too. It is a continuum, not just a choice.
Regulation always seems controversial. One extreme is that regulation is a dead weight on efficiency. Others say regulation is the only protection for consumers.
Regulating is difficult. A balancing act. Regulation should not pick winners among venture start-ups or the latest fads. The market chooses success based on hard work in the industry, whether it is an established company or new one.
ECC believes that the best regulation protects customers and allows the marketplace to advance the industry to serve customers. The state should monitor and regulate. The state is not the business. The industry has a goal to serve customers with reliable and affordable service and to be given the opportunity to earn an allowable rate of return.