Prospects for Performance-Based Ratemaking in New Hampshire

Photo of Steven J. Yannacone
Steven J. Yannacone
Associate, Administrative Law and Litigation Departments
Published: New Hampshire Business Review
February 23, 2024

On January 16, 2024, the Senate Energy and Natural Resources Committee held its initial hearing on Senate Bill 320 (SB 320), which would require the New Hampshire Public Utilities Commission (PUC) to establish performance incentive mechanisms for electric and gas utilities that tie the revenues a utility collects to the achievement of specific policy goals.  So-called performance-based ratemaking (PBR) is an alternative to traditional cost-of-service (COS) ratemaking.

The Declaration of Purpose for SB 320 states that under traditional COS ratemaking, “utilities are reimbursed for their expenses and guaranteed a return on investments.”  While expressing support for PBR and a willingness to work with legislators, Eversource Energy explained that under COS ratemaking, the rate of return is not guaranteed, but, rather, a utility is given the opportunity to collect the revenues and earn the return on investment permitted by the PUC. Unitil Energy Services similarly stated its general support for PBR, noting, however, the importance of regulatory certainty for utilities and customers.

As described in SB 320, PBR differs from COS inasmuch as it “focuses on outcomes and encourages utilities to achieve specific targets and metrics.” PBR is not a particular plan, but rather the umbrella term for alternative ratemaking measures intended to either improve efficiency or align utilities’ activity in the electricity market with public policy environmental or equity goals. The practice is becoming more common.  Both Liberty Utilities and Eversource have proposed some form of performance-based ratemaking in recent rate cases.

Under current law, non-traditional ratemaking methods may only be approved by the PUC if, among other things, they “provide[] the utility the opportunity to realize a reasonable return on its investment.” Pursuant to SB 320, the PUC would instead “consider” a variety of incentive mechanisms linked to efficiency and infrastructure, as well as the broader goals of society, including rate affordability and volatility risk, peak load reduction through demand response, rapid integration of distributed energy resources, adoption of time-of-use rates, improvement of reliability and safety, customer satisfaction, and fair compensation for employees.

Clean Energy NH’s Sam Evans-Brown described PBR as a tool to align the utility business model, which he characterized as prioritizing the interests of existing shareholders, with the goals of state policy makers and societal needs.  He emphasized the importance of setting measurable goals that incentivize utilities to meet policy objectives and suggested a meeting of interested parties to clarify the details of the legislature’s directive to the PUC.

Senator Watters, the prime sponsor of SB 320, acknowledged the complexities inherent in PBR but remarked that in his view incentivizing utilizes to adapt to the realities of changing energy supplies and peak demand might serve to optimize the safety, reliability, and affordability of that service. He supported the use of metrics mandated by the Legislature through the PUC as an appropriate way for policy makers to serve the public good.

The Consumer Advocate, Donald Kreis, critiqued current COS ratemaking as allowing the utilities an unnecessarily generous return on their investments.  While supporting SB 320, he remarked that attempts to implement PBR have had mixed results. In particular, Mr. Kreis pointed to a report by the Regulatory Assistance Project, a team of clean energy experts, including former energy and environmental regulators, which concluded that “every jurisdiction faces its unique set of challenges, for which unique solutions are required.”   Nevertheless, he expressed optimism that New Hampshire’s uniquely small size and collaborative approach in such cases will lead to success.

Deana Dennis of the Community Power Coalition of NH proposed to amend SB 320 to enable competitive electric power suppliers, including community power aggregations, to offer innovative rates and services comparable to those offered by utilities to their default service customers.

The PUC provided an update on PBR efforts and indicated that it was not taking a position on the advisability of PBR but it recommended that action on SB 320 be deferred pending a thorough assessment of the PUC’s resources and the solicitation of input from stakeholders.  Similarly, the New Hampshire Department of Energy (DOE) described the complexities, technical challenges, and potential unintended consequences of PBR, remarking that significant time may be needed to refine the legislation as introduced.   In particular, the DOE expressed concern over the subjectivity of the word “fair” in measuring employee compensation, and how to establish what constitutes “fair compensation” in a multi-year rate plan.

The DOE also believes that the 18 months allowed for the PUC to adjudicate PBR criteria is too short a timeframe. To that point, the bill requires the PUC to establish such criteria specifically tailored to “each electric and gas utility” in New Hampshire. The PUC is also directed to repeat the process whenever a utility proposes a “new and higher” rate pursuant to RSA 378:5 or whenever the Commission fixes that utility’s rates pursuant to RSA 378:7.

No particular PBR methods, criteria, or technologies are set forth in the legislation—with one exception. That exception is Multi-Year Rate Plans (MYRP). The bill mandates that utilities propose an MYRP, and if a utility declines to do so, the PUC is directed to set one for it. MYRPs are generally supported by utilities, because if properly designed they can provide utilities with increased incentives to cut costs between rate cases. The MYRPs would expire every four years, and utilities would be required to submit a new plan one year prior to expiration of the current plan.

Senators Avard and Pearl, members of the Energy and Natural Resources Committee, asked a range of questions about the mechanics of SB 320 and the potential practical impacts, including the possibility that incentive mechanisms could be changed with every two-year election cycle.  The bill has been referred to interim study.