What is ‘performance-based regulation,’ and how can it lower utility bills?

Lawmakers are advancing legislation that could lay the groundwork for future bills aimed at pushing major utilities to lower costs, reduce outages and improve customer service through a model known as “Performance Based Regulation.”

Senate Bill 251, sponsored by Sen. Scott Surovell, D-Fairfax, and House Bill 903, sponsored by Del. Rip Sullivan, D-Fairfax, would direct the State Corporation Commission to establish a study group to determine how to implement regulatory changes designed to reduce utility bills. 

Sullivan said in an interview with The Mercury that, “There’s a sort of an unfortunate incentive built into the current process where, in a way, spending more money is good for Dominion’s bottom line. So let’s make spending less money good for their bottom line.”

Utilities such as Dominion Energy and Appalachian Power Company petition the SCC for a return on equity, or ROE, which determines how much they can earn on the projects they build and other aspects of their portfolio. 

Recently, the SCC approved Dominion for an increase in its ROE to 9.8%. Under a performance based regulatory system, one potential approach would be to evaluate how well utilities meet goals set by the commission and tie that performance to possible adjustments in their ROE during a rate case.

“I’ve got no problem with Dominion making money,” Sullivan said. “But let’s create incentives that would have them make money in different ways and in ways that would lower ratepayers bills.”

Examples of incentives that could allow utilities to earn their ROE — or whatever reward is deemed appropriate by the SCC or legislation — include evaluating homes for air leaks that drive up energy bills. Another option would be identifying and addressing areas where power outages occur frequently and improving grid reliability.

“It’s a lot easier to plug the holes in homes and businesses that are keeping our squirrels warm than it is to build a new generation. It’s by far cheaper,” Surovell said. “But the utility doesn’t get the profit benefit out of that, for the most part.”

The bills also direct the SCC to examine whether rate adjustment clauses, or RACs — commonly known as riders that place the cost of projects such as the Coastal Virginia Offshore Wind project or coal ash removal directly on customers’ bills — could instead be folded into the base rate that every customer pays.

“Because RACs don’t get as much scrutiny from the SCC,” Surovell said.

Fuel costs for gas plants that generate electricity in the state are a direct passthrough expense for utilities, meaning whatever utilities pay for the fuel is what they can charge customers and they don’t earn a profit. Similarly, the cost of buying renewable energy certificates from the PJM market to comply with the Virginia Clean Economy Act is passed directly on to customers, according to Surovell. 

The legislation asks the commission to consider creating a cost-sharing structure for those expenses between ratepayers and company shareholders to offset some of the financial risk.

“They have certain goals they have to hit on the VCEA. If they don’t hit them, they can make up the difference by buying RECs. We know energy certificates on the market,” Surovell said. “And because those noncompliance costs are straight pass through, they don’t necessarily have the incentive to get it done properly.”

In 2024, lawmakers passed legislation directing the SCC to study how performance-based regulation could be implemented in Virginia through stakeholder meetings and formal recommendations. 

The report, released a year later, states that “when done well, PBR creates an improved regulatory structure that allows the utility to recover prudently-incurred costs and provides the utility with an opportunity to earn a fair return while holding it accountable to a set of identified areas of concern.”

“We’re asking the SCC to figure it out. Ask the experts, tell us if there’s a way that would save everybody money,” Sullivan said.

More than 10 other states have adopted incentive style performance regulations, and several others are considering changes to tie policy goals to potential rewards for utilities that meet them.

The bills set different deadlines for when the requested reports would be delivered to the General Assembly, a discrepancy that would need to be resolved before final passage. Any follow-up legislation would likely be considered in one to two years during future legislative sessions.

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