RIIO to REV: What U.S. Power Reform Should Learn from the U.K.

Abstract

Our current electricity economy is in a state of flux, from talk of a “death spiral” and customers abandoning the grid to utilities working to limit renewables and impose fixed fees, ostensibly for grid reliability and stability. Regulatory reform to change how utilities generate power and interact with consumers is occurring all over the country, spurred by new economic realities, customers demanding choice, and federal rules. U.S. regulators want a system that is reliable but promotes competition and other consumer benefits. Many of these have been summed up as wanting a performance-based system rather than a capital-based system.

As states look to implement the EPA’s Clean Power Plan, they should learn lessons from the new regulatory performance-based system adopted by the United Kingdom, RIIO. RIIO, which stands for revenue = incentives innovation outputs, was designed to achieve many of the same goals as the regulatory reform currently underway in the United States. Incorporating parts of the RIIO framework into the regulatory discussion in the United States could be especially helpful at this point in time.

This article provides an overview of RIIO, highlighting three aspects which should be incorporated into the regulatory frameworks of states: 1) longer rate cases; 2) proportionate assessment; and 3) a focus on total expenditures limiting regulatory asset value used in rate cases. While RIIO is only used for transmission and distribution in the U.K., there is a potential for its performance-based approach to be used in both generation and transmission and distribution in the U.S. The article will discuss how RIIO could be applied across regulatory frameworks in the U.S. to vertically-integrated utilities as well as deregulated transmission and distribution companies.

As the initial impetus for looking at RIIO was determining how it could apply to New York’s Reforming the Energy Vision (“REV”) process, the article will conclude with a discussion of how the parts of RIIO highlighted are likely – or not – to be implemented as part of REV, based upon the New York Public Staff’s Track 2 white paper. While New York’s public staff did seem to adopt certain parts of RIIO, like benchmarking, much more could have been implemented.

Keywords: regulatory reform, performance-based regulation

JEL Classification: K23, L43, L94, L95, L98, Q48