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Episode #82: 'Highlighting The Performance Incentive Mechanisms To Advance Utility Goals' With Karl Rábago [an Energy Central Power Perspectives™ Podcast]

The utility landscape today is filled with more goals competing for attention and funding than at any time in history, and the regulatory processes that are compelling utilities to make progress towards those targets are constantly ramping up the pressure. But similar to how technology for utilities is advancing, getting more complex, and unlocking new possibilities, the regulatory mechanisms at play are also widening in scope, methodology, and outcomes.

One particular area of interest for modern utility leaders is the advancement of Performance Incentive Mechanisms, or PIMs. PIMs are part of the broader world of performance based regulations (PBRs), and utilities are seeing them gain prominence and favor with their local regulators and public utilities commissions. The web of regulatory frameworks that utilities have had to navigate has always been a complicated one, but more so than ever it can be tough to keep track. In this episode of the podcast, Karl Rábago is featured to help make sense of it all. Karl has spent over 30 years in the utility sector, making impressions via time at the Public Utility Commission of Texas, the Department of Energy, AES, Austin Energy, the Rocky Mountain Institute, and more. He brings that experience to chat with podcast host Jason Price and producer Matt Chester about what he’s seeing in today’s regulatory landscape and why PIMs are gaining traction.

Prefer to Read vs. Listening? Scroll Down to Read Transcript.

Thanks to the sponsor of this episode of the Energy Central Power Perspectives Podcast: West Monroe. 

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TRANSCRIPT

Jason Price: 

Hello, and welcome to another exciting episode of the Energy Central Power Perspectives podcast. The show where we bring in leading voices in the world of power and utilities to discuss the latest challenges and trends, transforming and modernizing the energy systems and the utility industry of the future. And a quick thank you to West Monroe, our sponsor of today's show. Now let's talk energy.

Jason Price: 
I'm Jason Price, Energy Central podcast, host and director with West Monroe coming to you from New York city. With me as always from Orlando, Florida is Energy Central producer and community manager, Matt Chester. Matt, our guest today is a well respected and leading voice in the energy community. And his current mission is representing the solar trade industry to make sure the transition to the clean energy future is efficient, affordable, and effective. To do so, he's taking a thought leadership role on the regulatory process across the country. But specifically, in Illinois, that is currently playing out and observing the interactions between regulators and utilities. He is trying to make sure that common sense prevails. Matt, why is today's discussion sounding like one of those jokes where an activist, a regulator and a utility rep walk into a bar?

Matt Chester: 
Well, I don't know if I know the punchline to that one, Jason, but I do know we're in for a masterclass in the world of utility regulation. Given the patchwork of bodies that oversee the power sector, everything from national to state to local level, is a dizzying field to keep up with. And it's one that personally, I lean the most on the expertise of those in the energy central community to keep up with. So, I'm grateful to have that opportunity today to dig in with one such expert.

Jason Price: 
Yeah, I agree. Well, the regulatory process behind the utility sector is one that can be exceedingly complex and hard to keep tabs on. That's why we rely on the expertise of industry leaders, such as the one joining us today. He's here to share his insights into the world of Performance-based Regulation or PBR. Typically, this process includes Performance Incentive Mechanisms or PIMs, that offer utilities flexibility to meet existing as well as evolving goals in new ways. But that may not always be the case in practice, according to today's expert. So joining us today is Karl Rábago. Karl has spent three decades in the utility business. And when you review his resume, it's clear, he really has done everything there is to do.

Jason Price: 
After leaving the military, he spent time as a college professor, a commissioner on the public utility commission of Texas, a federal executive manager at the DOE, an advocate with the environmental defense fund. A principal at the Mountain Institute, roles with AES and Austin energy, and executive director at Pace Energy Climate Center. And worth noting, that's only about half the entries on his LinkedIn resume. These days, Karl is an independent consultant working in the electricity sector, specifically focusing on clean and smart energy. And we're thankful that he took some time out of his busy schedule to chat with us today. So with that said, Karl Rábago, welcome to the Energy Central Power Perspectives podcast.

Karl Rábago: 
It is great to be with you two guys and thank you so much for having me be a part of this conversation community. I was wondering if the opening joke was going to be, an armored cavalry officer drives his tank into a bar. But, we won't get into that one right now.


Jason Price: 
So Karl let's just dig right in. Although the Energy Central audience are, are of course the smartest people in the room, but the ins and outs of the regulatory environment may still be a source of confusion or uncertainty for a lot of us. So, let's start from the top. What's the regulator's role in the world of utilities, especially in balancing sometimes competing outcomes like equity, clean energy market efficiency and more?

Karl Rábago: 
That's really the 69 million dollar question, isn't it? We've got a utility industry that has largely functioned the way it has for over a 100 years. We've got regulators who have largely performed their duties as regulators have for 100 years, but the situation has gotten a lot more complex. We've been readably introducing the voices of lots of different stakeholders. New technologies and policies are in front of us. So the situation has gotten more complicated and it's being driven by legislative imperatives, that utility regulation accomplish more than just overseeing simply the rates or the construction plans of utilities. Do you think about it... In the once upon a time, a 100 years ago, our utility industry and our regulatory relationship was about getting America electrified and providing at least basic electric service to everyone. And in that mission, and in those times, it was actually an easy job to do.

Karl Rábago: 
If we built bigger plants and bigger infrastructure, the prices fell for electric service. So biggering was better. And growing the electric utility system was a matter of approving whatever new proposals for power plants and infrastructure utilities could bring us. Well, they succeeded. We now have virtually everyone in the country with access to reliable affordable, and well functioning electric service. Utilities have done a great job of building the grid that we can all depend on. They were helped of course, by public power utilities who are really there first and by cooperatives providing service in rural areas. But times have changed. We don't need to build a whole new grid anymore. We need to keep this one working well and having it do a bit more than it used to. Bigger power plants are not less expensive anymore. At least the very biggest ones that we saw, nuclear, coal plants.

Karl Rábago: 
We have to account for more costs than we ever did before. Not just the cost of electric rates, but also the cost on the environment and the cost of service not being provided in equitable fashion. Like I said, we have to account for the fact that we've been trying to introduce the forces of competition into what was an exclusively monopoly franchise. First, at the large wholesale level and now increasingly at the distribution level. It's gotten tough to be a regulator. It's gotten tough to be an electric utility. The missions are still the same. Safe, reliable, affordable electric service from utility service providers.

Jason Price: 
So Karl, we brought you in today to talk about and dive into the Performance-based Regulations or PBR, as well as Performance Incentive Mechanisms or PIM. So take us through the PBR docket and the role of PIM. What exactly is a PBR and why are we starting to hear more about this?


Karl Rábago: 
Right. So, a reason why we're hearing a lot more about it is because regulators need to find new ways to achieve their mission as set out in the implementing regulatory statutes that they've been provided by regulators. We're looking for new opportunities for utilities to make money doing more of the right things we want to do. And as I said, building out a new electric grid is not necessarily on the agenda, though there are improvements required and some expansions required of course. Let's take a step just for a moment into the old world of cost of service regulation or cost plus regulation as its practice, for example, in the Department of Defense. Utilities were allowed and encouraged to make big capital investments to go to capital markets and find big bags of money if you will, in order to build big power plants and big transmission lines and big systems all over the place.

Karl Rábago: 
The system we set up said that if you make capital investments, you get a profit. But if all you do is pass through expenses, you just get those dollar for dollar. The effect that has on the motivations of our electric utilities, is well documented. Back in the '60s some economists famously wrote an article about how this capital-driven profit incentive built into rate-making was the thing that motivated utilities and encourage them sometimes even to pursue investments that might not be the most cost effective if they were just bigger. It's fair to say that the height of the nuclear power plant building boom, was an example of utilities trying to spend more, even if it wasn't the most efficient way to spend. And the public utility regulatory policy act was passed to create an alternative to the biggering philosophy, the biggering approach that the rate making formula gave us.

Karl Rábago: 
Okay. That approach worked. When we needed a big grid, we got a big grid. Now, what approach do we take? PBR, Performance-based Regulation is the response to the need to change the motives and motivations of our electric utilities. Not throw the baby out with the bath water, but to take that basic incentive for shareholder benefits and turn it into a driver for an electric system that meets today's needs as well as the old established needs of safe, reliable, and affordable electricity. The simplest way to describe PBR is that, it's an idea of using regulation to pay utilities for doing what we want them to do and not just for growing bigger.

Jason Price: 
That's an interesting concept. So given that you've worked through numerous PBR cases in your times, what are some of the key lessons you've learned about this process and what should utility leaders keep in mind?

Karl Rábago: 
So let's talk about a couple of the basics of PBR. The ultimate goals are pretty ambitious. We're not going to get there all at once. But the ultimate goal is to first, see if we can eventually do away with what's called the CAPEX OPEX bias. That is, that the utility has this preference based on the old rate making formula of just investing more shareholder capital to earn more profits for their shareholders. In some ways, we've said, "Well look, if they spend money on operations, we are going to not penalize you by not giving you a profit on it." And even if those operations, for example, reduce sales... So once upon a time, we came up with ideas like decoupling, where utility could keep its revenues and profit levels as if they kept selling more electricity, as if they spent more on capital investments, even if they sold less electricity and some of that spending was just on operating expenses, like energy efficiency programs.

Karl Rábago: 
So we tried to fix that a little bit with PBR and it still has that goal of saying, "Hey utility, we don't want you to just find the most capital intensive solution. We want you to find the solution that delivers the best results for customers at the lowest cost." Alongside of that. We've also introduced ideas like Performance Incentive Mechanisms, which say that when you really hit the ball out of the park, when you really succeed at achieving those goals that we've added to your menu of responsibilities like reducing greenhouse gases or reducing the energy burden in low income households or accelerating the transition to distributed energy resources in a competitive market environment, or all those other kinds of things that are on the table today, we'll not only pay you your expected fair rate of return, we'll give a little bump for the shareholders too.

Karl Rábago: 
So between those two, we fix the financial side of the utilities incentives. But wait, there's more. We also want to create an environment in which utilities don't feel like they're being micromanaged by regulators and have to come in for rate increases every year if they get more efficient. So we invested in the idea and are investing in the idea of multi-year rate plans. Also, an idea that was around before, but is definitely a part of Performance-based Regulation. If the utility knew they could stay out of the hearing room for several years and they had a pretty good idea of where their money was going to come from and that they had approval to go forward with their plans without, after the fact second guessing by regulatory prudence processes, then maybe they would look inward and say, "Hey, how do we achieve our ultimate goals in the least expensive way possible?"

Karl Rábago: 
I want to break that one down just for a second. Let's say, it cost the utility a million dollars to do something. Just run for a year. It's a very small utility. It needs a million dollars a year to run, to pay its staff, to accomplish its programs, to keep the system safe, reliable, and affordable. Let's say we agree with them that a million dollars a year plus appropriate rate of inflation, we're willing to promise you can have that for, say, four or five years. The idea is that with making that promise in advance with of course, a reasonable amount of oversight, "Show me your receipts, keep the system running, perform according to these standards, but you can count on getting that million dollars plus inflation." Under that environment, then what should happen is the utility says, "If I can figure out how to do all of that million dollars worth of work for $900,000, I'll get a 10% extra profit. And if I figure how to do it for an $800,000, my profits go up even more."

Karl Rábago: 
So being able to stay out of the regulatory gauntlet. Being able to avoid some of the post hoc criticism, the second guessing that a lot of utilities feel they're subjected to, is supposed to encourage them to pursue their goals at lower cost. But of course, we don't want them to let the system fall apart. So what we'll do is, we'll say, "We need standards. We need performance metrics that you will hold yourself to during that long, if you will, stay out period." That's where Performance Incentive Mechanisms come in. A process of designing an expected level of performance. Let's say, meeting a system, reliability metric, or helping customers interconnect their distributed resources more quickly. Or a host of other things that could come up associated with operations. Once we set those standards, what we say is that, if you fall below achieving those standards, you could get a penalty. But if you exceed those standards, you could get an extra reward.

Karl Rábago: 
Okay, so now I've painted the picture. Performance-based Regulation, is about giving the utility the space to be innovative and creative in pursuing great service at lower cost. Performance Incentive Mechanisms, not only confirm the standards we want them to meet, but also provide an incentive for outperforming our expectations. At the end of that four or five year stay out period, everyone should be happy. We re-look at the costs, we re-look at the performance standards. We incorporate any new requirements or we drop of those that no longer need that extra attention and do it all over again. That's the setup. Now let's talk about how we've been doing and what we've learned. Not everybody's doing Performance-based Regulation, but I think everybody's talking about it. And we're talking about taking a step wise approach towards implementing Performance-based Regulation. Some amazing conversations, legislation, regulation, and proceedings going on in several exciting places across the United States.

Karl Rábago: 
And we've borrowed from ideas that were developed overseas in Europe as well. So what are some of the lessons we've learned from starting down the road to this new regulatory paradigm where performance trumps spending? Well, the first thing we've learned is that this really is a different way for utilities to behave. The learning curve on PBR is pretty steep. It's just not the way most our utility people and systems have been set up to operate. What goes along with that fortunately, or maybe unfortunately, and the good news for the bad news of the steepness of that curve, is that the climb is long.

Karl Rábago: 
It takes a while to do all these things. The metaphor we always use in the utility sector, it takes a while to make aircraft carrier turn just like it takes a while to make utilities reform their approach to how they provide service, spend money and do the things they've been doing. So we have some time to play with it. If you're an advocate that might lead to some impatience it definitely leads to a need for regulatories to prioritize the outcomes they want the utility to focus on.

Jason Price: 
Do you ever take an international or global perspective on this and are there countries where the model is a bit different and PBR is the standard practice? Does this exist at all?

Karl Rábago: 
Well, the truth is that the United States has been very successful over the course of the last 75 or so years in deploying its business model of how to do electric utility business. We made it a condition of international lending when we told other countries how they should set up their rate-making systems and their utility systems. When I worked at AES and worked with our regulatory affairs directors in 27 different countries, there was remarkable uniformity across all the countries where we operated. Some differences in how much the federal versus the state authorities have power. But the basic model we've exported to a lot of places. Now, in great Britain, they've been working longer than we have on a process called RIIO. And I have to admit, I don't remember what the acronym. It a basically a platform for introducing Performance-based Regulation that we've learned a lot from their early examples. Nation states in which they practice more national electric utility systems look more like public power enterprises and therefore have less of this CAPEX bias, the driver for new infrastructure.

Karl Rábago: 
But remember a lot of countries over the past 75 years, were first just building their electric utility systems and our old cost plus model worked pretty well there. The bottom line of my response to your question is that, we stand to be leaders in regulatory innovation again. And we can actually export our skill and the technologies to implement PBR, like better monitoring and data acquisition and utility transparency and equitable delivery of services. So, I actually see us as on the cusp of leading again by developing PBR and then finding jobs for consultants like me to travel the world and tell them what we've learned as well as to do good and help those people do good by their people.

Jason Price: 
Yeah, for sure. So how do the different viewpoints and desired outcomes or the relevant stakeholders get resolved in the PBR process? And why is that resolution so important?

Karl Rábago: 
So stakeholders and diverse stakeholder voices are critical leading PBR designed well, and implemented well. And to provide help to the utility in achieving the things we're going to expect them to do. When you got to look at the Climate Equity and Jobs ACT, that Illinois just passed, you will see that we have a really big push in that statute to make sure that all voices are at the table. And the commission is really focusing on this. Why? Well, because we need those diverse viewpoints if we're going to do something fundamentally different. So the key is, if we're changing regulation and the approach to regulation, let's get everybody in the room to work on the new approaches. Stakeholder participation is a fundamental aspect to successful PBR in my opinion.

Jason Price: 
Okay, let's talk more broadly. If you had the ear of the C-suite of utility, what would you tell them about PBR? And how might that differ from the messages you deliver to the Wall Street analyst?

Karl Rábago: 
So I focused on one. The utility executives are successful if the company's stock is successful, if the dividends get paid at a healthy level and on time. So there's really a close fit already between the financial community and the C-suite. But more importantly, these are professionals, and they want to make sure that they continue to deliver whatever utility can deliver. And that is, access to this wonderful energy resource of electric service. What I would tell the C-suite then is, first of all, if you embrace this, you can satisfy the expectations of the financial community. In fact, I think you can make them happier than they've ever been before. You already have the problems and the challenges that should be pushing you in this direction. Sales have been flat for a decade or more across much of the country. Customers are getting more efficient. Homes buildings are using less electricity to get the same services out of it.

Karl Rábago: 
Electricity generating power plants are not the big profit generators they used to be, especially in the old fields like nuclear and coal construction. So you need new ways to satisfy your customers that run on lower capital levels. You need to retool yourself to think about how to capture savings opportunities, wherever you can.

Jason Price: 
Indeed, Karl, no doubt you're going to get a lot of activity from this podcast. I feel like the conversation's going to continue growing and you're going to be an important voice in the PBR movement. But let's move the conversation now to who's Karl Rábago. Who's the man behind all this expertise. I want to introduce you to the lightning round, which is where we'll ask you a couple of quick questions and you provide back a one word response or phrase. Are you ready?

Karl Rábago: 
Yeah, let's do it.

Jason Price: 
All right. So what's the most productive time of the day for you?

Karl Rábago: 
When I'm on my bike. I don't have a computer in front of me, I'm cycling down a trail. Here in Denver we've got beautiful trails and the garbage falls out and the things I need to think about work in my brain.

Jason Price: 
What is your most dreaded chore around the house?

Karl Rábago: 
I actually have a pretty good position on that. When Pam and I got married, she had two boys that I adopted and we realized that in order to have the relationship that a lot of young couples start out with, we had to divide up the chores just so we could have some time with each other. The kids are all grown now got grandkids and everything, but that division has held. That means that Pam is usually the one doing the dishes because I like to cook. It means I do the gardening. She does the weeding. And we keep life in balance. So we've worked out the chores' thing 43 years ago, and it's still working.

Jason Price: 
Karl, what is your favorite meal? And what would include?

Karl Rábago: 
It's got to be Tex-Mix. Something Tex-Mix. It's got to have chilies and cheese and delicious fragrance sauces and the chewiness of a good tortilla. My dad is from Del Rio, Texas. And he and my grandmother taught my German mother how to cook that stuff. And it's stuck with me. And so it's going to be something like I said, with sauce, tortillas, cheese, salsa. I've got to have some peppers in there. That's my go-to food.

Jason Price: 
All right. This is a good one. With the benefit of hindsight, what advice would you give to the younger version of yourself at the beginning of your career?

Karl Rábago: 
It's the lesson I learned. Which is, get your personal life straight, commit to that and then follow your bliss in choosing what your professional work is. Priority is specific. If you've got a supportive spouse partner... If you've got a family to take your mind off of work and to focus you on the right things to do with the time in your day, you are going to be better at work and you can choose the jobs that fill the rest of your psychic needs.

Jason Price: 
And lastly, what are you most passionate about?

Karl Rábago: 
Professionally, I have been passionate about distributed energy resources of all kinds for quite some time. I see it as a technology suite, a service suite, an industry approach that gives us the best opportunity for environmental performance, as well as for equitable distribution of benefits and costs. It's also an approach that allows us to constantly challenge the status quo for the opportunity for improvements. It's why I like PBR. It's healthy to ask the tough questions and it explains why I've had so many jobs in advocacy.

Jason Price: 
Karl, thanks for sharing this insight and really giving us a deep look into what's going on in your world and how you're thinking about it. So, we want to thank you and look forward to a time when we can have you back give some further perspective. I know that our audience is going to appreciate it and you probably have a lot of questions and comments waiting for you. Thank you again for your insight in joining us today.

Karl Rábago: 
Thank you so much for having me. It's been a real pleasure talking of these things.

Jason Price: 
You can always reach Karl through the Energy Central platform where he welcomes your questions and comments. And we also want to give a shout out of thanks to our podcast sponsors that made today's episode possible. And that's thanks to West Monroe. West Monroe works with the nation's largest electric and gas water utilities in their telecommunication grid modernization and digital and workforce transformations. West Monroe brings a multidisciplinary team that blends utility, operations and technology expertise to address modernizing aging infrastructure, advisory on transportation, electrification, ADMs deployments, data and analytics and cybersecurity. And once again, I'm your host Jason Price. Plug in and stay fully charged in the discussion by hopping into the community at energycentral.com. And we'll see you next at the Energy Central Power Perspectives podcast.

 

About Energy Central Podcasts

The ‘Energy Central Power Perspectives™ Podcast’ features conversations with thought leaders in the utility sector. At least twice monthly, we connect with an Energy Central Power Industry Network community member to discuss compelling topics that impact professionals who work in the power industry. Some podcasts may be a continuation of thought-provoking posts or discussions started in the community or with an industry leader that is interested in sharing their expertise and doing a deeper dive into hot topics or issues relevant to the industry.

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The Energy Central Power Perspectives™ Podcast is hosted by Jason Price, Community Ambassador of Energy Central. Jason is a Business Development Executive at West Monroe, working in the East Coast Energy and Utilities Group. Jason is joined in the podcast booth by the producer of the podcast, Matt Chester, who is also the Community Manager of Energy Central and energy analyst/independent consultant in energy policy, markets, and technology.  

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