In March 2024, the Virginia General Assembly passed House Joint Resolution No. 30 and Senate Joint Resolution No. 47 (hereafter referred to as the Joint Resolution).(*1) The Joint Resolution directed the Virginia Department of Energy (Department) to conduct a stakeholder process on performance-based regulation (PBR) in Virginia. Per the Joint Resolution, the stakeholder engagement process was to inform a Virginia State Corporation Commission (SCC) study on the potential implications of implementing a performance-based regulatory structure for investor-owned electric utilities (IOUs) in the Commonwealth as a means to improve alignment with Virginia’s goals.

This study intends to fulfill the requirements and meet the goals outlined in the Joint Resolution, which are provided in Section 2.1, Introduction, Study Scope, and Legislative Directive. The analysis in this study focuses on Virginia’s two largest investor-owned utilities (IOUs): Virginia Electric and Power Company, doing business as Dominion Energy Virginia (Dominion), and Appalachian Power Company (APCo). This study also provides a list of recommended strategies for Virginia’s consideration. These strategies offer pathways to more strongly incentivize utility achievement of the Commonwealth’s desired outcomes, and are provided in Table 2 in Section 2.5, Recommendations for Virginia.

The SCC selected the Great Plains Institute (GPI) and Current Energy Group (CEG) to complete this study in fulfillment of these requirements. The SCC also secured technical assistance from Pacific Northwest National Laboratory (PNNL) through the State Assistance Technical Program. PNNL staff provided research and technical analysis support throughout the report development process. This study is being developed pursuant to Joint Resolution directives and SCC orders in Case No. PUR-2024-00152, In the matter concerning performance-based regulation and alternative regulatory tools for investor-owned electric utilities.

This report reflects the views and recommendations of GPI and CEG as independent consultants aided and informed by (i) the stakeholder process described herein, and (ii) additional technical consultants described above. The SCC initiated and coordinated the undertaking of this study as directed by the above-referenced legislation, but takes no position concerning the policy analysis or recommendations contained in this report.

1.1 What is Performance-based Regulation?

At the broadest level, PBR combines a set of regulatory mechanisms and processes that aim to align utility outcomes with regulatory objectives. The Joint Resolution provides a list of PBR and alternative regulatory tools to be evaluated. A regulatory framework is not inherently “performance-based" because it uses one or more of these mechanisms. Rather, effective incentive regulation emerges when a comprehensive and complementary suite of regulations is structured to motivate outcome-oriented utility performance that delivers desired results.

A PBR framework can motivate the utility to manage costs without compromising service or reliability while calibrating financial incentives with public interest. When done well, PBR creates an improved regulatory structure that allows the utility to recover prudently-incurred costs and provides the utility with an opportunity to earn a fair return while holding it accountable to a set of identified areas of concern (outcomes or performance areas, such as those provided in the Joint Resolution). The utility is also empowered to make prudent and strategic business decisions, which should be flexible and not exhibit anti-competitive behavior that prevent customers or other suppliers from conducting business within broader policy and market structures. In this manner, PBR can provide a “lift all boats" incentive realignment, by which utilities’ interests align with customer interests and policy goals, and which are compatible with competitive business opportunities in the broader economy.

This approach contrasts with traditional cost-of-service ratemaking (COSR) in which the primary design imperative is to recover costs incurred to deliver primary utility services, plus a fair rate of return on capital (rate-based) expenditures. Under COSR, absent any controls or incentive realignment, utilities have a strong interest in maximizing capital expenditures (e.g., by constructing new generation facilities or conducting expansive grid upgrades) rather than pursuing lower-cost, more operations-oriented strategies (e.g., energy efficiency programs).

1.2 How Can Performance-based Regulation Benefit Virginia?

Interest in PBR reflects a recognition of the shortcomings of the COSR model, in addition to an expanded set of outcomes that are expected from the modern utility system. Legislators and regulators may pursue PBR as a tool to help achieve a wide array of policy goals or desired outcomes. While PBR can seek to address multiple objectives or outcomes, it is useful to prioritize and down-select to a subset of primary objectives when constructing PBR regulations. Participants in the Department’s stakeholder process also reflected this sentiment, stating a desire to clarify the specific goals and outcomes that a PBR structure would address in Virginia. Below we suggest a consolidated list of performance areas for Virginia electricity regulations, based on the Joint Resolution and informed by the Department’s stakeholder engagement process:(*2)

• Cost control, including removing perverse incentives for the “capex bias"
• Affordability
• Reliability (reduced frequency and duration of outages)
• Environmental performance, including achievement of Virginia Clean Energy Act goals
• Customer service and satisfaction
• Program improvements (e.g., customer enrollments, energy efficiency attainment, etc.)
• Promotion of new technologies and innovations
• Encouragement of alternative solution development

Virginia’s identified policy and regulatory objectives correspond to the broad PBR objective to improve utility performance. From the Joint Resolution, those include performance improvements for affordability, reliability, and customer service; enhancing cost-containment incentives; and making progress on energy efficiency and decarbonization goals. Should the SCC undertake future work to design and adopt PBR reforms (that is, after the evaluation phase that is the focus of this study), then some formalization of priority outcomes is a useful starting point.

1.3 Recommendations

This study reviews many options and design considerations to improve electric utility regulations in Virginia. From the broad discussions of this study, we elevate a targeted set of six specific recommendations for focus:

1. Continue rate adjustment clause (RAC) reform to reduce the number of RACs and the total amount of costs collected through RACs.

2. Open a fuel cost investigation with the objective of creating a fuel cost-sharing mechanism or comparable reform to incentivize reduced fuel costs.

3. Open an investigation of renewable portfolio standard (RPS) financial incentives for the purpose of aligning utility incentives and risk-sharing to achieve greenhouse gas reduction goals.

4. Develop a set of targeted performance-incentive mechanisms (PIMs), including updates to strengthen achievement of energy efficiency targets and select additional priority outcomes.

5. Employ all-source competitive procurement in future utility resource procurement in a manner that allows participation from resource alternatives, including clean energy supply and demand-side management (DSM) solutions.

6. Develop an integrated PBR framework with an externally-indexed revenue cap multiyear rate plan (MRP) and complementary mechanisms, including, for example, decoupling, earnings sharing mechanism (ESM) improvements, capex-opex equalization tools, and an integrated set of PIMs and shared savings mechanisms (SSMs) for priority outcomes.

In addition to these recommendations, we emphasize two cross-cutting considerations that can support more effective, outcome-aligned regulations:

• Ensure that the SCC has sufficient authority to properly design, implement, and maintain an effective regulatory framework

• Place affordability and cost containment at the center of all regulatory decisions.

These recommendations, as well as essential design choices and the related considerations, are discussed further in the Legislative Report and throughout the Technical Report.

1.4 Structure of this Study

This study is divided into three chapters, summarized below.

Chapter 1, Executive Summary, describes the purpose of this study, provides a high-level conceptual overview of PBR, outlines potential benefits that a PBR framework can offer, and previews the primary recommendations of this work.

Chapter 2, Legislative Report, presents the primary findings and recommendations of this work, which respond to the requirements of the Joint Resolution and are drawn from the analysis contained in the Technical Report. It identifies some notable features and limitations of current Virginia electric utility regulations, explains different PBR mechanisms, and identifies ways that a PBR framework could help improve alignment with the regulatory objectives, performance areas, and desired outcomes outlined in the Joint Resolution.

Chapter 3, Technical Report, provides details and supportive information to help Virginia stakeholders and decision makers understand the current context related to utility ratemaking and regulation in the Commonwealth. The Technical Report is divided into several sections, which focus on the following items:

• Details on the Department’s stakeholder engagement process

• Virginia’s current regulatory and legislative context

• Utility performance under Virginia’s current regulatory construct

• PBR and alternative ratemaking tools

• Ratemaking reform in other jurisdictions

• Potential implications related to competitive service providers and carbon leakage from the manufacturing sector

Each section in Chapter 3 contains details intended to inform decision makers who may be considering whether an alternative ratemaking construct could benefit Virginia, and to be responsive to the Joint Resolution.
_________________________________________________
(*1) House Joint Resolution No. 30/Senate Joint Resolution No. 47 (“Joint Resolution"), Requesting the State Corporation Commission, in collaboration with the Department of Energy, to study performance-based regulatory tools for investor-owned electric utilities in the Commonwealth, Regular Session (Virginia 2024).
(*2) Virginia Department of Energy, Performance-based Ratemaking (PBR) Study Stakeholder Report (May 16, 2025), Parts 1 and 2 https://www.scc.virginia.gov/docketsearch/DOCS/85mt01!.PDF and https://www.scc.virginia.gov/docketsearch/DOCS/85m%2501!.PDF.