Could States Look to Performance Based Ratemaking for CPP Compliance?

The Clean Power Plan (CPP) is a mandate to the states; each state must develop a plan (whether on their own or in conjunction with other states) to ensure that carbon emissions from the electricity generating plants in their state meet the CPP requirements. Because the current rule allows states to incorporate energy efficiency into their implementation plans, it is likely that the majority of states’ CPP compliance plans will require direct actions from electric utilities, whether that utility owns generation or not.

One consideration states will have to tackle is how to ensure utilities meet the required carbon emission reduction requirements. A traditional cost of service model typically relies on mandates through state regulations or public utility commissions to get a utility to meet similar types of goals such as improvements in energy efficiency or renewable energy development and integration. While this model can work, and has worked in the past, the CPP may represent an opportunity for states and public utility commissions to explore new regulatory models to ensure cost effective and innovative strategies for compliance with the CPP.

A performance based ratemaking scheme might offer an opportunity for regulators to engage utilities in reducing carbon emissions while allowing the utility to engage the market in identifying cost effective solutions for the required carbon emission reductions. Setting targets for emission reductions, renewable energy generation, or energy efficiency improvements with incentives for performance or penalties for non-conformance could ensure a state meets the CPP requirements while giving utilities the flexibility to find viable solutions and earn a return on investment.

How the CPP will ultimately be implemented by each state will become clear only as the rule is finalized and state plans are developed. Yet it is already clear that the CPP has the potential to disrupt a wide-variety of industries and electric utility and regulatory models.

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