Utility Performance Incentive Mechanisms Joe Dammel Minnesota Attorney General’s Office NASUCA Mid-Year Meeting June 25, 2018 Minneapolis, MN

“If you wish to make an apple pie from scratch, you must first invent the universe.” - C. Sagan

“If you wish to make a performance incentive mechanism from scratch, you must first invent the existing cost-of-service utility regulatory structure.” - Not C. Sagan

BUILDING THE SANDBOX

Building the Sandbox DEMAND COSTS

Building the Sandbox THROUGHPUT CAPITAL

RENOVATING the Sandbox RATES THROUGHPUT EFFICIENCY RENEWABLES GHGs CAPITAL DERs

RENOVATING the Sandbox ALT COST REC THROUGHPUT MYRPs FUEL ADJ. DECOUPLING CAPITAL INCENTIVES

Rethinking the Sandbox COMPONENTS OF A PIM: PERFORMANCE METRIC TARGET FINANCIAL INCENTIVE

Rethinking the Sandbox 1. ARTICLUATE GOALS 2. ID DESIRED OUTCOMES 3. ID METRICS 4. EST. METRICS 5. EST. TARGETS 6. EST. INCENTIVES 7. EVALUATE & REPEAT

Rethinking the Sandbox 1. ARTICLUATE GOALS 2. ID DESIRED OUTCOMES 3. ID METRICS 4. EST. METRICS 5. EST. TARGETS 6. EST. INCENTIVES 7. EVALUATE & REPEAT

Goals Outcomes Metrics Hierarchy

Goals Outcomes Metrics Hierarchy WHY WE REGULATE WHAT WE WANT WAYS TO MEASURE

Goals Outcomes Metrics Hierarchy

Regulatory Goals Why we regulate utilities. It is hereby declared to be in the public interest that public utilities be regulated as hereinafter provided in order to provide the retail consumers of natural gas and electric service in this state with adequate and reliable services at reasonable rates, consistent with the financial and economic requirements of public utilities and their need to construct facilities to provide such services or to otherwise obtain energy supplies, to avoid unnecessary duplication of facilities which increase the cost of service to the consumer and to minimize disputes between public utilities which may result in inconvenience or diminish efficiency in service to the consumers. Minn. Stat. s216B.01, Legislative Findings

Regulatory Goals Why we regulate utilities. It is hereby declared to be in the public interest that public utilities be regulated as hereinafter provided in order to provide the retail consumers of natural gas and electric service in this state with adequate and reliable services at reasonable rates, consistent with the financial and economic requirements of public utilities and their need to construct facilities to provide such services or to otherwise obtain energy supplies, to avoid unnecessary duplication of facilities which increase the cost of service to the consumer and to minimize disputes between public utilities which may result in inconvenience or diminish efficiency in service to the consumers. Minn. Stat. s216B.01, Legislative Findings

Regulatory Goals Why we regulate utilities. Customer Focus “adequate and reliable services at reasonable rates” Operational Effectiveness “to avoid unnecessary duplication of facilities which increases the cost of service to the consumer” Financial Performance “consistent with the financial and economic requirements of public utilities” Public Policy Responsiveness

Regulatory Goals Why do we regulate utilities? Customer Focus Outcome Metric Operational Effectiveness Financial Performance Public Policy Responsiveness

Desired Outcomes What do we want from utilities? Customer Focus Metric Operational Effectiveness Financial Performance Public Policy Responsiveness

Desired Outcomes: Customer Focus What do we want from utilities? Customer Focus Outcome Metric

Desired Outcomes: Customer Focus What do we want from utilities? Customer Focus Service Quality Metric Reliability

Tied to policy goals, outcomes Quantifiable Verifiable Clearly Defined Performance metrics How do we measure? A metric should be: Tied to policy goals, outcomes Quantifiable Verifiable Clearly Defined Under Utility Control

Reliability is an outcome, SAIDI is a metric. Performance metrics How do we measure? Reliability is an outcome, SAIDI is a metric. Customer service is an outcome, call answer time is a metric. DER penetration is an outcome, interconnection wait time is a metric.

Performance metrics Customer Focus Service Quality Reliability How do we measure? Customer Focus Service Quality Call answer time # Complaints Reliability SAIDI SAIFI

Customer Satisfaction Operational Effectiveness Financial Performance A Potential Hierarchy Customer Focus Service Quality Customer Satisfaction Affordability Empowered Customers Operational Effectiveness Cost Control Asset Mgmt. Resiliency Public Policy Grid Mod. DERs Carbon Intensity Energy Eff. Financial Performance Return-on-Equity Rider Revenue Productivity

Three Paths PIMs Traditional Modern Hybrid

Thank you Follow along at home! MNPUC docket no. 17-401 Questions? Contact Joe Dammel, joseph.dammel@ag.state.mn.us