Performance-based regulation (Phase I)
Next generation (or Phase II) is now underway.
Rate Regulation InitiativeThe Alberta Utilities Commission is changing the way distribution utility rates are set in Alberta to make companies more efficient and keep utility costs lower for Albertans. This new rate regulation initiative is called performance-based regulation, or PBR.
Q. What is performance-based regulation? A. Performance-based regulation is a method of calculating and setting utility rates using a formula that adjusts utility rate changes to inflation minus an enhanced efficiency or industry productivity factor. Except in limited circumstances, rates can only rise less than inflation. A properly designed PBR system provides incentives to companies to operate more efficiently.
Q. How is that different from what we have now? A. Right now utility rates are set by adding up the expenses of a utility in providing utility service, plus a pre-determined rate of return for the utility company. Those overall costs are then paid by ratepayers. When a utility’s expenses rise, its rates rise. Under PBR, there will be stronger incentives to minimize costs and rate increases.
Q. Why the change? A. Performance-based regulation is designed to financially encourage utilities to be more efficient and for ratepayers to also benefit, while safeguarding system reliability and service quality. It is also designed to reduce the number, length, cost and complexity of regulatory hearings.
Q. Why now? A. The AUC has been studying PBR as a means of applying competitive market-like pressures to monopoly utilities for some time. It has been working carefully with industry and consumer groups on how this could be implemented since 2010 and has now created a framework designed to keep rates lower than they would be under the current system.
Q. Have other jurisdictions done anything similar to this? A. There are several jurisdictions in Canada (federal and provincial), in the United States and around the world that have successfully introduced performance-based regulation plans. Those plans and their results were studied and analyzed as part of the AUC’s efforts here in Alberta.
Q. What utilities will be affected by the new rules? A. Alberta’s electricity and natural gas distribution utilities – ATCO Electric Ltd. FortisAlberta Inc., Epcor Distribution & Transmission Inc., ATCO Gas and Pipelines Ltd. and Alta Gas Utilities Inc. – will move to PBR. These are the companies that own and operate the lines and pipes that bring electricity or natural gas to your home or business from the transmission networks. Electricity distributor ENMAX Power Corp. moved to an individual PBR plan in 2009.
Q. How about transmission companies and transmission rates? Will they be part of PBR? A. Not at this time.
Q. When will the change be effective? A. The AUC anticipates the changes will come into effect January 1, 2013.
Q. How long will the initial PBR term be in place? A. For five years, with rates adjusted annually using the performance-based formula.
Q. Are all the utility-specific details in place now? A. No. On September 12 the Alberta Utilities Commission issued a decision setting out the new PBR framework. As part of that decision, the distribution utilities are now each required to file details with the AUC about how they individually will meet the framework.
Q. What about service quality or network reliability? A. The Commission already monitors service quality, and will be strengthening safeguards and enforcement. That work is already underway.
Q. That’s all fine and well, but how will standards be enforced? A. There will be well-defined service quality measures, targets and non-compliance penalties. The AUC has the power in law to fine companies up to $1 million a day for each contravention, the power to set utility terms and conditions, and the power to force a utility to give up any profit it may have gained from breaking the rules.
Q. How can I get more information on performance-based regulation and the work the AUC is doing? A. More information, and links to our PBR decision (Decision 2012-237) and other documents can be found on the AUC website at www.auc.ab.ca. There is a dedicated area on our home page. Alternatively, you may reach our consumer relations group at 403-427-4903 or via email at email@example.com.