Performance-Based Regulation of Electric Utilities

Performance-based regulation and performance incentive mechanisms help align utility planning and costs with customer needs and broader systemic and societal goals such as affordability, efficiency, greenhouse gas reductions, and energy resilience.

Table Of Contents
  1. Why This Matters
  2. Policy Solution
  3. Model Policy Features
  4. Potential Limitations & Pitfalls
  5. Complementary Policies
  6. Additional Information
  7. Examples
  8. Resources
COMMUNITY BENEFITAffordability, Transparency, Resilience, Public Health, Environment, Decarbonization, Energy Reliability
KEYWORDSClean energy, Decarbonization, Distributed energy, Efficiency, Electricity, Resilience, Shutoffs, Utility bills, Utility rates
REGIONState
AFFORDABILITY STRATEGYUtility Reform: Accountability
OVERSIGHTUtility Commission
POLICY MECHANISMLegislation, Regulation, Executive

Why This Matters

Investor-owned utilities have traditionally been regulated based on a “cost-of-service” model in which the costs of capital investments they make in order to provide electricity to customers are fully recoverable through the setting of electricity rates, thus rewarding utilities for spending more money. Cost-of-service is associated with a series of perverse incentives that drive up utility bills for ratepayers and often impede societally-important goals such as energy efficiency and greenhouse gas reductions. These perverse incentives include: “CapEx” bias, which is the preference to invest in large capital expenditures over operational solutions, such as non-wires alternatives, virtual power plants, and grid-enhancing technologies; “goldplating” capital investments—spending more than is necessary—in order to increase shareholder earnings based on authorized, and often inflated, return on equity; a “throughput” incentive to increase electricity sales (and resist conservation and efficiency) as a way to increase revenues based on established rates; and, an institutional bias against third-party or customer-owned energy, because these alternatives can undercut a utility’s earnings from its own investments and electricity services.1 Today, with growing demand combined with increasing grid vulnerability, the Cost-of-Service model is at odds with affordability and carbon reduction goals, contributing to rising overall system costs and higher electricity costs for customers.2 This unprecedented energy affordability crisis clearly requires fundamental change in the principles, purposes, and processes of utility regulation.

Policy Solution

Performance-based regulation (PBR) is gaining significant traction in a number of states as a way to fundamentally restructure utility incentives by connecting cost recovery to outcomes and policy goals that benefit utility customers and serve societal needs. PBR refers to a suite of mechanisms that can be used incrementally, or altogether, in a comprehensive manner, to improve utility performance in multiple dimensions ranging from customer affordability and overall system costs to societal goals such as decarbonization and energy resilience.

Model Policy Features

PBR frameworks can involve a suite of policy mechanisms to shift utility investments away from a cost-of-service model towards meeting specific performance goals and outcomes. Below we focus on three of these components: Multiyear Rate Plans (MRP); Performance Incentive Mechanisms (PIM); and Revenue Decoupling. For other strategies—such as CapEx–OpEx Equalization strategies to try to reverse CapEx bias—see, for example: The Nuts and Bolts of Performance-Based Regulation (RMI).

  • Multiyear Rate Plans (MRP): In setting utility rates, MRP is an approach that, in principle, aims to promote cost-containment by setting a fixed revenue requirement (the authorized amount of revenue recoverable from ratepayers) across a multiyear timeframe, as much as five years. MRPs are intended to encourage utilities to increase profits through productivity gains and operation and capital savings instead of repeatedly raising rates to pay for unnecessary capital expenditures and other measures. Flexibility is also included through revenue or price adjustment mechanisms that can be targeted for certain planned or unpredictable costs (or both) between rate cases, such as interconnection costs to accelerate grid decarbonization.
  • Performance Incentive Mechanisms: Performance Incentive Mechanisms (PIMs) establish incentives in specific areas of need for customers and society. PIMs typically work by setting targets for performance change, measuring progress (or regress) toward these targets, and rewarding (or penalizing) utilities on a negotiated but fixed basis, affecting their financing/revenues based on performance instead of capital expenditures. Incentive forms vary but generally focus on affecting either return on equity (thus impacting shareholders) or the utility’s revenue requirement. This is often structured such that performance in a rate cycle is assessed as part of determining the utility’s authorized revenue requirement or rate of return on equity in the following rate cycle.3 There can also be multi-factor PIMs which incorporate overlapping goals of utility performance, for example tying together decarbonization and affordability goals by incentivizing generation-shifting to community-sited or load-proximate renewable electricity sources.4 The key to effective PIMs is tying targets to specific metrics, which are the basis for measuring performance and determining costs or penalties. To ensure public accountability, this requires regular, transparent, up-to-date, publicly accessible data reporting on performance metrics. Examples of performance metrics in key areas could include:
    • Affordability:
      • Number of customers in federal- or state-designated low-income census tracts enrolled in utility energy discount programs and energy efficiency and weatherization programs. 
      • Aggregate and average annual bill savings for households enrolled in low-income utility customer programs. 
      • Number of customer shut-offs/notices, payment plans, and average and total arrearage amounts by census tract. 
      • Reduction in energy burden in low- and moderate-income communities.
    • Renewable Energy:
      • Share of renewable energy as part of a utility’s total portfolio of energy generation or supplies.
    • Energy efficiency:
      • For residential customers, overall and per-customer usage changes tied to utility energy efficiency programs and incentives. Ideally, this includes specific targets for low-income households.
  • Revenue Decoupling: This policy specifically addresses the “throughput” problem by decoupling utility revenue from electricity sales. Decoupling is primarily designed to encourage utility energy efficiency efforts, and it does so by ensuring that the utility’s received revenue remains equal to its authorized revenue even if electricity sales decline due to efficiency-related reductions in customer energy use.5,6 

Potential Limitations & Pitfalls

  • In multiyear ratemaking, utility forecasts can be used to overestimate impending costs, leading to less efficient and less affordable rates than may otherwise be needed;7 however, a revenue adjustment approach using external indices can limit this problem by linking annual revenue adjustments to circumstances outside of the influence of the utility. Linking revenue escalation to external factors is more likely to lead to greater efficiencies and long-term savings than utility-forecasted adjustments.8 
  • There are concerns about information deficits that can arise with PBR—namely that the utility has access to information not available to regulators or the public—such that the utilities advocate for performance benchmarks that are biased towards the utility, enabling them to claim greater earnings (or avoid penalties) due to the use of these skewed metrics.9 
  • With PIMs, there can be a bias toward enhancing positive and limiting negative financial impact. More generally, however, PIMs are hobbled by incentive weakness (rewards or penalties are modest or marginal); it can be difficult to measure results because of flawed metrics and unclear baselines of performance; and by potential overpayment to utilities for benefits that are not clearly measured or fully attributable to utility actions.10 Identifying a reliable counterfactual scenario to assess the performance of a given PIM (i.e. what would have happened without the PIM in place) can be very difficult.
  • In PBR more broadly, targets and metrics tend to be measured as systemwide values; for example, declining average energy usage across the service area could be a metric used in a PIM for energy efficiency. This approach to PIM design may be inequitable and could even be regressive if, for example, investments in energy efficiency are charged to all ratepayers but efficiency measures are primarily adopted by wealthier households. An equitable efficiency PIM could instead incorporate targets and metrics specifically for reducing the energy usage of low-income households; overall usage improvements would not be rewarded unless low-income households are directly benefiting as well.
  • Similarly, revenue decoupling used to encourage efficiency investments may result in rate increases that drive up bills for households that do not adopt energy efficiency measures. While this is meant to support overall reductions in energy consumption, it may inadvertently shift costs onto low-income households, renters, and others who face barriers to adopting energy efficiency measures, and should be coupled with targeted low-income programs and bill assistance measures to counteract such impacts.
  • PIMs’ performance data is often not clearly and transparently reported by utilities, making it difficult to ensure utility accountability; regular, up-to-date, publicly-accessible data reporting requirements can help overcome this challenge.

Complementary Policies

Performance-based regulation can be supported by a range of additional policies and improve the outcomes of others, such as: 

Additional Information

In varying forms, PBR is being implemented, has been officially established, or is being explored in more than 20 states as of 2024—mostly commonly via legislative directive or executive action.11 The National Association of Regulatory Utility Commissioners has studied Hawaii’s PIM for advanced metering infrastructure implementation, Illinois’ PIM for reliability, resilience, and customer service, and New York’s PIM for energy efficiency and demand side management. All three were found to have positive effects, but these effects are not quantified in the studies.12 

According to RMI’s national PIMs Database, the most prevalent categories as of late 2025 were, in descending order by number of PIMs: 

  • Climate Forward Efficiency: efficiency gains tied to GHG reductions; 
  • Demand Flex: customer-based usage flexibility mechanisms/tools for load balancing; 
  • Distributed Energy Resources: penetration, utilization, efficacy; 
  • Cost Control: tracking overall system costs and dealing with cost overruns; 
  • Fuel Cost Mechanisms: managing volatile cost impacts of fuel or power supply decisions; 
  • Transportation Electrification: EV charging infrastructure and grid connection; 
  • Reliability: standard and innovative measures, resilience criteria, equity considerations; 
  • Renewables: utility-scale/share of power supply; 
  • Affordability: low-income bill assistance and efficiency access/savings; disconnections/arrearage management.13

Examples

1. Instituting a Proceeding to to Investigate Performance-Based Ratemaking in Hawaii – Hawaii PUC Decision and Order No. 37507 (2020).

Details:14

  • After a two-year process required by legislation passed in 2018 (SB 2939), Hawaii’s Public Utilities Commission (HPUC) established the first comprehensive PBR framework in the nation in 2020, along with a shift to multiyear rate planning, with a five-year timeframe termed “MRP1.” The PBR framework applies to the Hawaiian Electric Company (HECO), an investor-owned utility serving 95 percent of the state’s population, and was understood to be a transformative replacement for the state’s longstanding cost-of-service model and process.15 
  • The 2020 decision was preceded by extensive stakeholder engagement including granting formal intervenor status to the Honolulu local government and the state’s leading advocacy groups for renewable energy and environmental sustainability.16 
  • The cornerstone of Hawaiian PBR is a requirement for multiyear rate plans with five-year control periods, with an Annual Revenue Adjustment formula that includes adjustments for inflation, productivity, exogenous events and impacts, and a customer dividend to ensure that ratepayers share in the benefits of PBR.17 In addition, the framework establishes a schema for performance metrics and scorecards for HECO, and includes a set of revenue-affecting Performance Incentive Mechanisms (PIMs) in ten areas, including customer access to advanced metering infrastructure; shared savings from lower fuel and power purchasing costs; acquisition of grid service capabilities from distributed energy resources (DERs); faster interconnection times; delivery of energy savings via energy efficiency to Low-and Moderate-Income (LMI) households; and progress toward the state’s codified Renewable Portfolio Standard (RPS) targets.18
  • Evaluating the PBR program under the first five-year rate plan, with the aim of informing potential modifications of the framework for the next five-year plan (MRP2), was scheduled to begin in the Spring of 2025, under Order No. 41639; however, the status of this evaluation process was unclear as of October 2025.

LIMITATIONS:

  • In the Spring of 2025, the HPUC greenlighted HECO’s request for a full traditional rate case with the stated intent of “rebasing,” i.e. raising (or lowering) base rates, to keep up with costs, outside of the PBR framework.19 PBR advocates argued that “rebasing” of rates between PBR-governed control periods violates the law establishing PBR in 2018.

Resources

Written: January 2026

  1. Goldenberg, C., Rebane, K. (2024), How to Restructure Utility Incentives: The Four Pillars of Performance-Based Regulation. RMI. ↩︎
  2. Hua, C. (2025). Utility Bills are Rising: An Analysis of How Utility Bills are Impacting American Consumers and Who Determines Them. PowerLines. ↩︎
  3. Whited, M., Woolf, T., Napoleon, A. (2015). Utility Performance Incentive Mechanisms: A Handbook for Regulators. Synapse Energy Economics, Inc. ↩︎
  4. See Debel, M., Shipley, J., Kihm, S., et. al. (2023). Improving Utility Performance Incentives in the United States. Regulatory Assistance Project. The Rocky Mountain Institute maintains an active PIMs database here. ↩︎
  5. See, generally, Natural Resources Defense Council. (2012). Decoupling-utility-energy.pdf. Between 2005 and 2017, for electric utilities, the average rate adjustment via decoupling was 0.4 percent. Decoupling can also lead to negative rate adjustments if usage and sales increase, but 64 percent of rate adjustments were positive over the period. See Cappers, P., Satchwell, A., Dupuy, M., Linvill, C. (2021). The Distribution of US Electric Utility Revenue Decoupling Rate Impacts from 2005-2017. Berkeley Lab and Regulatory Assistance Project. ↩︎
  6. Eighteen states have enabled decoupling for electric utilities and twenty-six states have done so for gas utilities. Gold, R. and Shipley, J. (2020) With the Shift Toward Electrification, Decoupling Remains Key for Driving Decarbonization. American Council for an Energy-Efficient Economy. ↩︎
  7. Maryland introduced an MRP pilot in 2020, which advocates argue has failed customers for lack of effective cost-containment mechanisms, among other things. See Howland, E. (2024). Exelon Utilities Urge Maryland PSC to Keep Multiyear Rate Process. Utility Dive. ↩︎
  8. For an in-depth technical review of common pitfalls and challenges with multiyear rate planning, see: Wilson, G., et. al. (2025). Fixing Multiyear Rate Plans: Building a Firm Foundation for Utility Cost Control. RMI. ↩︎
  9. Costello, K. W. (2020). How PBR Can Go Wrong. Electricity Journal, 33(7), 106801. ↩︎
  10. Lebel, M., Shipley, J., Kihm. S., Calice, M., and Cappers, P. (2023), Improving Utility Performance Incentives in the United States. Regulatory Assistance Project. ↩︎
  11. National Association of Regulatory Utility Commissioners, Performance-Based Regulation State Tracking Map, Performance-Based Regulation State Tracking Map – NARUC, updated 7/31/2024. ↩︎
  12. National Association of Regulatory Utility Commissioners. 2025. PBR State Work Group Examination of Example PIMs: AMI, Resilience, Energy Efficiency. ↩︎
  13. RMI. ”Emergent Topics.” PIMS Database: Emergent Performance Mechanisms Across the United States. Accessed October 10, 2025. ↩︎
  14. The full and ongoing PBR Docket No. 2018-0088 is here. ↩︎
  15. State of Hawaii Public Utilities Commission, Decision and Order No. 37507. A synopsis of the PUC order is here. ↩︎
  16. The results of this process, which was the basis for the 2020 final Decision and Order, are reflected and documented in Decision and Order No. 36326. Advocacy intervenors included the Blue Planet Foundation, Ulupono Initiative, Life of the Land, and several clean energy business associations. ↩︎
  17. State of Hawaii Public Utilities Commission. Overview of the PBR Framework. Accessed September 15. 2025. ↩︎
  18. State of Hawaii Public Utilities Commission. Monitoring Hawaiian Electric Progress. Accessed September 10. 2025; Hawaiian Electric. Performance Scorecards and Metrics. Accessed September 10, 2025. ↩︎
  19. Yerton, S. 2025. Hawaii Residents Could Face Electric Rate Hike in 2026. Honolulu Civil Beat. ↩︎