Performance Based Ratemaking: Does PBR Cut Bills?
Performance based ratemaking is one of those wonky phrases that ends up on your bill, whether you follow utility policy or not. If you have ever looked at rising rates and thought, “We’re paying more, so what exactly got better?”, you’re already asking the right question.
From our seat at the Alliance for Competitive Power (ACP), you see this tension constantly. Traditional utility rules can reward more spending, especially on big capital projects, even when cheaper or more flexible options could do the job. Performance based ratemaking tries to change the scorecard so utilities get rewarded for outcomes you can actually notice, like fewer outages, faster service, and more stable bills.
PBR can be useful, but only if you build it with real accountability. Otherwise, it turns into a complicated bonus program that customers fund. Below, you’ll get a practical walkthrough of how PBR works, what it can improve, and the guardrails you should insist on when your state considers it.
Why performance based ratemaking showed up in the first place
Most states still lean on cost-of-service regulation, sometimes called rate-of-return regulation. Here’s the basic problem you run into: when a utility’s profits rise with the amount it invests, the system can tilt toward “build it” solutions. Poles, wires, substations, pipelines, and other capital projects go into a rate base, and customers repay that investment over time.
That does not mean every investment is wasteful. You need a strong grid. But you also know the uncomfortable reality: customers can get stuck paying for expensive projects even when targeted grid upgrades, competitive procurement, energy efficiency, demand response, or other non-wires alternatives might have met the same need for less.
Performance based ratemaking emerged as a course correction. It aims to tighten the link between what utilities earn and what customers value. Lawrence Berkeley National Laboratory summarizes this shift well in its review of performance-based plans, focusing on stronger incentives for performance compared with the traditional model. You can read that overview at Lawrence Berkeley National Laboratory’s PBR review.
What performance based ratemaking means in plain English
In practice, performance based ratemaking is a set of tools regulators use to connect utility earnings to measurable results, not just spending levels. The National Association of Regulatory Utility Commissioners lays out the core idea: you set objectives, you define metrics, and you use mechanisms or formulas to adjust utility revenues based on performance. Their explainer is at NARUC’s performance-based regulation page.
So you should not think of PBR as one program you can “adopt” and check off. It is more like a blueprint. The outcomes, metrics, and incentives can look very different from state to state. That flexibility is powerful, and it is also where things can go sideways if the design is sloppy.
Two building blocks you see in PBR utility regulation
When you look across states, most PBR utility regulation plans lean on the same two components. They are not the only pieces you can use, but they show up again and again.
Multiyear Rate Plans (MRPs): Instead of resetting rates in frequent, heavyweight rate cases, regulators set a multiyear period with a formula for how rates adjust annually. Many plans use an inflation factor and a productivity factor to encourage cost control.
Performance Incentive Mechanisms (PIMs): These are targeted financial rewards or penalties tied to specific outcomes, like reliability, customer service, or interconnection speed.
If you have ever thought, “Utilities respond to what regulators measure,” you are already thinking like a PBR designer. The trick is picking metrics that match real customer experience, not just what is convenient to report. Utility Dive has covered how performance mechanisms became a centerpiece of modern PBR thinking in its piece on “the new utility business model,” available at Utility Dive’s PBR overview.
Performance incentives utility regulators actually use
When you are building performance incentives utility regulators can enforce, you want a few traits right away: the metric is clear, the data is auditable, the target is meaningful, and the utility cannot “win” by improving the number while customers feel no difference.
Here are common categories you will see, with the kind of measures that often sit underneath them:
Reliability: outage frequency and duration, restoration time after storms, feeder performance
Customer experience: call center responsiveness, complaint levels, billing accuracy, customer satisfaction
Interconnection and grid access: timelines for connecting distributed energy resources, queue transparency, process milestones
Affordability and arrearages: bill impact tracking, arrearage reduction, disconnection prevention performance
Efficiency and demand flexibility: verified energy savings, peak reduction, program cost-effectiveness
Most states also use a few safety features you should expect to see:
Deadbands: a no-payment zone around the target so small statistical noise does not trigger payouts
Symmetry: utilities can lose earnings for missing targets, not just gain earnings for hitting them
Caps: a limit on how large incentives can be, so one metric does not overwhelm the rate impact
So does performance based ratemaking cut bills?
This is the question you get in every stakeholder meeting, and you should keep asking it. PBR can help on bills, but it is not automatic. You typically see savings or bill restraint when the plan actually changes utility behavior in three ways:
It rewards cost control instead of passing every cost through to customers with minimal pressure to optimize.
It reduces “bonus for normal work” payouts by setting targets above business-as-usual performance.
It keeps utilities focused on least-cost solutions including non-wires alternatives and competitive options where they make sense.
There is also a timing issue. Even a well-built PBR plan can take a few years to show results, especially if you are trying to change planning practices, interconnection processes, or outage management systems.
If you want an example of how regulators talk about the tradeoffs, the Indiana Utility Regulatory Commission report on performance-based ratemaking discusses how multiyear approaches can provide more predictable revenues and stronger incentives for cost control, with potential consumer benefits like rate stability. You can find it at IURC’s Performance-Based Ratemaking report.
Where performance based ratemaking is spreading and what states are trying
You are seeing more state commissions explore performance based ratemaking because the grid is changing fast. Customers expect better reliability, faster connections for new resources, and more transparency. Regulators also want utilities to plan smarter, not just build bigger.
States have taken different approaches, from broad scorecards to a handful of targeted incentives. If you want a quick cross-state snapshot, Oregon’s Citizens’ Utility Board has a useful overview of performance-based ratemaking efforts across the U.S. at Oregon CUB’s PBR roundup.
The biggest risks in performance based ratemaking: easy targets, messy data, and gaming
If you are evaluating PBR, do not let anyone sell it as automatically “pro-consumer.” PBR is only as good as the measurement and enforcement behind it. When it is weak, customers can end up paying more for paperwork-level performance.
Here are the failure modes you should look for:
Unverifiable data: if the commission cannot audit the underlying data, incentives become a trust exercise.
Targets set too low: payouts for business-as-usual performance become customer-funded bonuses.
Metric tunnel vision: the utility optimizes for the score rather than the outcome, like rushing restorations that do not fix root causes.
Overcomplicated formulas: if stakeholders cannot follow the math, it is harder to catch errors and harder to participate meaningfully.
Those concerns show up in real-world critiques of PBR design. UtilityEducation.com flags the risk that without reliable measurement systems, regulators may struggle to verify claims and detect gaming. You can review that discussion at UtilityEducation.com on PBR incentives and risks.
What good performance based ratemaking looks like when you put consumers first
When you are in the weeds on a docket, labels do not matter. The scorecard does. From ACP’s perspective, consumer-centered performance based ratemaking should include guardrails that keep incentives honest and keep monopoly power from expanding under a new name.
Outcomes tied to customer value: reliability, affordability, transparency, and timely interconnection should be front and center.
Independent verification: standardized definitions, audits, and public reporting that stakeholders can actually use.
Real symmetry: meaningful downside risk for underperformance, not just upside opportunity.
Protection against shifting risk to customers: multiyear plans should not guarantee earnings regardless of results.
Respect for competitive markets: PBR should not become a back door for utilities to take over functions competitive providers can deliver more efficiently.
If you want to ground this in the bigger question of how your rates are built in the first place, our ACP explainer on the difference between regulated and competitive pricing walks through the basics at How are electricity rates set: regulated vs competitive.
How performance based ratemaking fits with ACP’s focus on competition
You will hear us say this a lot: PBR can help regulate a monopoly better, but it does not replace the discipline of competition. In vertically integrated states, PBR may nudge utility behavior in a better direction, yet the underlying structure still gives one provider a lot of control over planning and spending.
That is why we keep your attention on market design as well as ratemaking design. Competitive wholesale markets and consumer choice create ongoing pressure to innovate and control costs. Our work with FTI Consulting highlights performance differences between competitive and monopoly structures, and you can dig into those findings at ACP’s FTI study results.
And if your state is debating PBR while also expanding utility ownership or utility control into areas that used to be competitive, it is worth pausing. Those shifts can quietly rebuild monopoly power and put upward pressure on bills. We break down that pattern in our post Why states push utility monopolies and why it hurts you.
FAQ: Performance based ratemaking
Is performance based ratemaking the same as performance-based regulation?
They are often used interchangeably. In practice, performance-based regulation can refer to the broader framework, while performance based ratemaking is the part that changes rates and earnings. Either way, you are tying utility financial results to measurable outcomes instead of spending.
Will PBR lower your bill?
It can, especially if the multiyear plan drives real cost control and the incentives are not easy payouts. But it is not guaranteed, and poorly designed PBR can raise costs if it adds bonuses without real improvements.
Which metrics matter most to consumers?
Reliability and customer service are the most visible day to day. Affordability metrics matter when they track bill impacts and disconnections in a serious way. Interconnection metrics matter if you care about faster access to rooftop solar, storage, and other distributed resources.
Can utilities game PBR metrics?
Yes. You protect customers with independent data verification, transparent reporting, symmetry, and targets that represent real improvement rather than business as usual.
Does PBR replace competitive markets?
No. PBR is a way to better regulate monopoly utilities. Competitive markets are a structural tool that can discipline costs and improve performance through choice and independent providers.
Conclusion: PBR can help, but the fine print decides who wins
Performance based ratemaking can move regulation in a healthier direction by shifting the conversation from “how much did you spend?” to “what did customers get for it?” When metrics are strong and oversight is real, PBR can improve reliability, tighten cost discipline, and make utility performance easier to evaluate.
But if the targets are soft, the data is shaky, or the plan is too complex for the public to follow, PBR can turn into an expensive layer on top of the same old incentives. If your commission is considering PBR, you should push for transparency, verification, and a design that keeps competition in play wherever it can deliver value.
To follow ACP’s work on consumer-focused utility policy and competitive market reforms, visit Alliance for Competitive Power.
