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The ABCs of PBR

Fortnightly Magazine - July 15 1995

recommended by SDG&E.

Third, although it quite appropriately approved employee safety, customer satisfaction, and system reliability as quality control parameters, the CPUC incorporated an inappropriate fourth criterion involving a comparison of SDG&E's rates to a national rate index-inappropriate because the movement of SDG&E;s rates relative to such an index is driven more by exogenous events than by any cost-cutting behavior on the part of the utility.

The initial results of this experiment are hardly encouraging. In 1994, SDG&E was able to earn a rate of return 114 basis points above the baseline PBR return granted by the CPUC (10.17 percent earned versus 9.03 percent allowed). Under the regressive sharing mechanism, SDG&E shareholders captured roughly $32 million in shared savings, and another $7 million in rewards related to the quality control and national price index parameters. In contrast, SDG&E customers actually experienced a net rate increase of roughly $6 million, because after receiving $1 million in shared savings they had to finance the $7 million in rewards distributed to SDG&E.

This rate hike strongly suggests that, at least thus far, PBR is an abject failure in California if the CPUC's primary goal is to increase economic competitiveness by reducing electricity costs. Regulators in other states would be wise to regard the California PBR experiment more as a warning sign of the dangers of PBR than as a model.

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