AUC issues third-generation performance-based regulation decision

The AUC has a responsibility to ensure that customers receive safe and reliable electric and gas utility service at just and reasonable rates.

Rates for electric and gas distribution utilities in Alberta are set under a form of performance-based regulation (PBR). PBR is designed to mimic competition and encourage efficiency by providing incentives for the utility to reduce costs, while safeguarding reliability. In doing so, utility rates are kept lower than they might otherwise have been for customers.

Under PBR, rates are calculated by means of an incentive-based formula. The more efficient the utility operates, the more savings it realizes, which results in a greater rate of return, and since these benefits are then shared with customers, the lower the rates can be. Quality of service is safeguarded through separate, enforceable, AUC requirements.

PBR also reduces the regulatory burden because once the formula is set, the utilities do not need to get their costs approved annually as they would under the traditional ratemaking method, until the PBR term has expired. Alberta has five-year PBR terms and the impact of PBR and the resulting rates vary from utility to utility.

On October 4, the AUC issued Decision 27388-D01-2023, that outlines guidance and requirements on its third generation of PBR.

The AUC’s new PBR decision encourages Alberta’s distribution utilities to be more efficient and to share those gains with their customers. PBR uses a formulaic approach to limit distributors’ allowable revenue increases reflected in rates by requiring the distribution companies to meet demanding efficiency requirements.

The decision includes multiple avenues through which utilities will share benefits with customers during the term of the plan, some of which have not been used in prior PBR plans, including:

• A “stretch” factor which is incorporated into the X (productivity) factor.
• An X factor premium.
• An earnings sharing mechanism.

At the highest level, PBR aims to share benefits of efficiency gains with ratepayers. The elements listed above will lower costs for customers during the PBR term, and further cost reductions realized by efficiencies will be passed on to customers at the end of the PBR term during rebasing, with lower baseline rates for the next PBR plan.

More information about rate-setting in Alberta can be found on our web directory: How rates are set.