Welcome to the website of the Pacific Economics Group ("PEG") companies. The PEG consortium consists of two companies (PEG LLC and PEG Research LLC) that are active in the fields of litigation and utility regulation. Principals of these companies are based in California and Wisconsin and include several nationally recognized economists. Performance-based regulation (“PBR”), revenue decoupling, and other kinds of alternative regulation are company specialties. Please explore the site and learn more about the PEG companies and the services we provide.
Mark Newton Lowry has been invited to speak at the Annual Financial Forum of the Society of Utility and Regulatory Financial Analysts on forward test years. Dr. Lowry has been active in the forward test year field since writing a white paper on this alternative regulation tool for the Edison Electric Institute. A copy of this paper can be accessed here. The SURFA conference will be held April 28-29 at the Hilton Indianapolis Hotel and Suites.
Mark Newton Lowry, President of PEG Research, has been involved in the past year in the preparation of five reports that consider regulation of the electric "utility of the future". This work has included a role as consulting economist to the Powering Tomorrow Initiative, which was funded by the Energy Foundation and a diverse stakeholder group that included some of the nation's largest electric utilities and third party energy companies. Phase 2 of the Initiative considered alternative industry structures and appropriate regulatory systems for embracing higher levels of distributed energy resources. Powering Tomorrow has now released its Phase 2 final report entitled New Utility Industry Structures and Regulatory Packages in An Era of Increasing Energy Decentralization. A copy of the report is available here.
Also in January, Lawrence Berkeley National Laboratory published a paper Dr. Lowry coauthored entitled Performance-Based Regulation in a High Distributed Energy Resources Future. A copy can be obtained here. This paper explains disincentives electric utilities experience under traditional rate regulation to embrace efficient levels of demand-side management, distributed generation, and other kinds of DERs. Two well-established approaches to strengthening incentives to embrace DERs are considered: multiyear rate plans ("MRPs") and targeted performance incentive mechanisms ("PIMs"). The authors find that the strongest incentives to embrace DERs are provided by a "four-legged stool" supported by MRPs, revenue decoupling, the tracking of DER-related expenses, and PIMs that provide rewards for efficient DERs. The scope of PIMs should be extended beyond their traditional focus on conservation to encourage peak load management and distributed generation and storage. A variety of other strategies are detailed that can apply to utilities in various special situations. A webinar to discuss results of the project was held January 27th. The webinar and associated slides can still be accessed on the LBNL website here.
PEG Research LLC has completed a new survey of trends in Alternative Regulation ("Altreg") for the Edison Electric Institute, available here. The survey, entitled Alternative Regulation for Emerging Utility Challenges: 2015 Update, provides authoritative, up-to-date discussions and precedents for most popular forms of Altreg, including revenue decoupling, lost revenue adjustment mechanisms, multiyear rate plans, marketing flexibility, capital cost trackers, forward test years, and formula rates. The report explains how Altreg tools can improve upon traditional regulation in addressing changing business conditions that include rapid technological change, the advancing age of some utility systems, and increased concern by customers and policymakers about the environmental impact of utility operations. Mark Newton Lowry, President of PEG Research, was senior author of the report.
Pacific Economics Group ("PEG") Research LLC has completed a paper on Multiyear Rate Plans for US Electric Utilities for the Edison Electric Institute ("EEI"). Mark Newton Lowry, President of PEG, was senior author of the paper. Multiyear rate plans ("MRPs") are the most popular approach to performance-based regulation ("PBR") around the world. Ubiquitous overseas, including the "RIIO" approach to regulation used in Britain, MRPs are an increasingly popular means of regulating energy utilities in the United States and Canada. The paper explains the growing popularity of MRPs and explains their potential value in helping utilities respond to emerging industry challenges such as rapid technological change, increased competition from distributed generation, and growing pressure to improve the environmental impact of their operations. Key precedents in the English speaking world are detailed and thorny issues in MRP design are explained. Special advantages of MRPs include improved operating performance, increased marketing flexibility, and stronger incentives to embrace distributed energy resources. The paper is currently available only to members of EEI's multiclient study on PBR.
Mark Newton Lowry filed testimony on performance-based regulation ("PBR") for the transmission and distribution services of Hydro-Quebec. He was the only consultant chosen in August by the Regie de l'Energie to provide testimony from amongst three who were nominated. PBR is now required for the T&D services of Hydro-Quebec under Article 48.1 of the Regie's authorizing legislation. The Regie has established three goals for PBR mechanisms: 1) continual improvement in performance and service quality, 2) sharing benefits of cost reductions between consumers and the utility and 3) reduced regulatory cost.
Application of PBR to transmission is commonplace overseas but unusual in the US and Canada. Hydro-Quebec operates the largest transmission system in North America and exports large quantities of clean hydroelectric power to the northeastern US. Dr. Lowry drew on his extensive experience to trace the outlines of workable PBR plans for Hydro-Quebec's T&D services.
PEG member Dr. Cicchetti has filed an amicus curiae ("friend of the court") brief before the United States Supreme Court in support of FERC Order 745. The order, which called for placing demand response programs on the same level as generation in wholesale power markets, was overturned by the Court of Appeals for the District of Columbia Circuit. Dr. Cicchetti's brief endorses the economic reasoning behind FERC's Order 745 and concludes that compensating demand response resources as outlined by the FERC will foster both economic and energy efficiency, while striking down Order 745 will impede market and operational efficiencies.
Lori Smith Schell has become a Senior Advisor to PEG Research. She is a Certified Energy Risk Professional ("ERP") with over 25 years of experience in the energy industry, including policy analysis work at the U.S. Department of Energy and Los Alamos National Laboratory. Lori is the 2015/16 Vice President-Communications of the International Association for Energy Economics ("IAEE") and is Past President and Senior Fellow of the United States Association for Energy Economics ("USAEE").Quantifying the costs and benefits of emerging energy technologies, including all types of solar technologies and fuel cells is a specialty. Her current focus is on "power-to-grid" economics, the use of excess renewable generation to produce hydrogen for injection into natural gas pipelines. She works closely with the Advanced Power and Energy Program at the University of California-Irvine to provide MATLAB-based economic analysis in support to APEP's technical modeling. Dr. Schell was previously the Director of Energy Risk Management for Trigen Energy Corporation, a combined heat and power company focused on maximizing the efficiency of distributed generation. She represented Trigen on the Board of Directors of the Independent Power Producers of New York, Inc. She earlier served as the Manager of Regulatory Affairs & Energy Market Analysis for Air Products and Chemicals, Inc., and as a Project Manager at Benjamin Schlesinger and Associates, Inc. Lori holds a Ph.D. in Mineral Economics and Operations Research from the Pennsylvania State University and a B.A. in Economics (Honors) from the University of Washington. She and her husband, Jeff, live in Durango, Colorado where they raised their three daughters.
Blaine Gilles, a Senior Advisor to PEG Research, has been providing economic research and interim senior management services to Conversion Energy Systems, Inc. (“CES”), a Chicago-based startup firm. CES is a leader in the development of advanced thermal conversion technologies for use in disposal of medical, contraband, military and municipal wastes. CES plans to act as a distributed energy resource provider, utilizing a proprietary thermal gasification technology to process certain types of solid waste, extracting recyclable materials and energy. CES recently executed a strategic partnership agreement with Science Application International Corporation (“SAIC”), for the sale and integration of its technology in advanced solutions for the U.S. federal government.
Mark Newton Lowry has been asked to coauthor the third technical report in the Lawrence Berkeley National Laboratory’s (“LBNL”) Future Electric Utility Regulation series. The white paper will be on Performance-Based Regulation (“PBR”) in a high distributed energy resource (“DER”) future. The report is expected to discuss the use of multiyear rate plans and performance-based metrics focused on DER. Dr. Lowry is joining an expert advisory group of state regulators, utilities, stakeholders and national experts who are working on the Future Electric Utility Regulation project. In conjunction with this white paper, at least one public webinar will be held to present the results of the final published report to state regulators, policymakers, utilities and other interested parties. The report is expected to be released in late 2015.
LBNL is a member of the national laboratory system supported by the U.S. Department of Energy and managed by the University of California. Its staff includes 13 Nobel prize winners. LBNL’s research is focused in a wide array of scientific disciplines including policy analysis and technical assistance activities at the state, regional and national levels in electricity markets, electricity sector policies, and coordination of national, regional and state electricity policy.
Larry Kaufmann, a Senior Advisor to PEG Research, recently advised the staff of the Ontario Energy Board ("OEB") on a custom incentive regulation (“IR”) plan proposed by Toronto Hydro. The company proposed a price cap index of inflation-X form that is similar to those used today by most Ontario distributors, as well as a “C factor” intended to provide supplemental compensation for high expected capital expenditures. The Board requires statistical benchmarking evidence for custom IR applications. Dr. Kaufmann was asked to analyze the benchmarking work underpinning the Custom IR plan and the X and C factors that the company proposed. PEG’s analysis found that the benchmarking work supporting Toronto Hydro’s Custom IR plan was conceptually and empirically flawed. The combination of data errors and an unwarranted explanatory variable used in the benchmarking analysis over-stated Toronto Hydro’s estimated productive efficiency by more than 40%. PEG also found that Toronto Hydro registered a bad reliability performance and was projected to become an inferior cost performer over the term of its Custom IR plan. Given its substandard performance on both cost and reliability, PEG recommended that the X factor contain a “stretch” factor of between 0.6% and 1.0%. PEG also found Toronto Hydro’s C factor was not designed appropriately and would over-recover the Company’s projected capital expenditures under Custom IR. PEG accordingly recommended an adjustment in the C-factor calculation that would reduce price growth under the plan by an estimated 1.5% in each year. All evidence and arguments in the case have been filed, and the Board is expected to issue its decision on Toronto Hydro’s Custom IR proposal sometime this summer.
Larry Kaufmann, a Senior Advisor to PEG Research, recently moderated a session at the annual Oil Conference of the Canadian Energy Research Institute ("CERI") in Calgary, ALTA. The session addressed the growing transportation of oil by rail rather than pipeline, and the safety and regulatory concerns associated with this development. Dr. Kaufmann recently became a Research Fellow at CERI.
Mark Newton Lowry spoke at the Electric Utility Rate Cases conference in Las Vegas on “How Alternative Approaches to Regulation such as Revenue Decoupling and Performance-Based Regulation (Including Britain’s “RIIO” Approach to PBR) Can Help Regulate the 'Utility of the Future.'" The conference, organized by Law Seminars International, was held March 5-6 in Las Vegas. Dr. Lowry discussed the potential for multiyear rate plans with revenue decoupling and a mix of cost trackers and award/penalty mechanisms to spur innovation and balance incentives for cost containment and other goals such as clean energy.
Mark Newton Lowry has been retained as an economic advisor to the Powering Tomorrow initiative. This initiative, led by several former regulatory commissioners, is designing new regulations and laws for electric utilities which are more appropriate for an era of rapid technical change and increased penetration by distributed energy resources. The initiative has been funded by a group of prominent stakeholders. Dr. Lowry developed a new regulatory framework for the initiative and presented it at a recent meeting with stakeholders in Tempe, Arizona.
Mark Newton Lowry has been chosen by the Edison Electric Institute to lead a multiclient study on Performance-Based Regulation for Emerging Utility Challenges. The project will consider the potential roles of award penalty mechanisms, multiyear rate plans, and marketing flexibility in providing US investor-owned electric utilities with the timely rate relief, performance incentives, and operating flexibility they need to meet emerging challenges. Deliverables for the project include national webinars and white papers.
PEG Research wishes to congratulate Jean Tirole of the Toulouse School of Economics for winning the Nobel Prize in Economics. Dr. Tirole did pathbreaking theoretical research on incentive regulation of utilities through such classic works as A Theory of Incentives and Procurement in Regulation (Cambridge, MIT Press, 1998). Our hope is that the international recognition accorded to Dr. Tirole will prompt American regulators to take a closer look at the PBR option. A rare example of world-class PBR in North America can be found here.
Mark Newton Lowry, President of PEG Research, gave a presentation on Performance Based Regulation ("PBR") for the Utility of the Future to Minnesota's e21 Initiative. Convened by the Great Plains Institute and other parties, the e21 Initiative is working with Minnesota utilities, consumer advocates, and other stakeholders to map out a transition to a new regulatory model for Minnesota. Goals of the e21 initiative include:
- transition to a sustainable, carbon-neutral energy system;
- economically-viable utility business model(s) that support energy efficiency, renewable energy, distributed generation, and advanced energy technologies;
- reasonable rate of return for utilities;
- fair allocation of costs between customer classes; and
- reduced regulatory administration costs and resources.
PBR can play a key role in the attainment of these goals.
Dr. Lowry also spoke at the 2014 symposium of the Financial Research Institute at the University of Missouri in Columbia. His remarks there chiefly addressed the potential of distributed solar power generation to trigger disruptive change for vertically integrated electric utilities. He prepared a brief paper for conference participants that showed how changing business conditions are prompting VIEUs today to file for frequent small rate increases. These filings are triggering increased experimentation with multiyear rate plans.
Dr. Lowry has been active in the performance-based ratemaking field since the early 1990s and still produces results for clients in the regulatory arena. The most recent victory was in September. Pursuant to directives by the British Columbia Utilities Commission, Fortis had filed performance based ratemaking ("PBR") proposals for Fortis BC Energy, the largest BC gas utility, and Fortis BC, an electric utility. The PBR plans featured revenue decoupling and revenue cap indexes of general form inflation - X + customer growth. The BCUC chose revenue cap index formulas that were largely in line with Dr. Lowry's input price and productivity research and testimony. Both PBR plans have a term of six years.September 2014
The U.S. government and the Navajo Nation reached a settlement in a lawsuit alleging more than 50 years of U.S. government mismanagement of royalties from extracted resources on the Navajo reservation. The government will pay $554 million, the largest amount that it has paid to a single American Indian tribe in a lawsuit. The Navajo Nation was advised by PEG members Charlie Cicchetti and Colin Long.
PEG Research was recently retained by the Ontario Energy Board to prepare econometric benchmarking models for power distributor cost and reliability. Econometric cost models are a form of "top down" benchmarking that is also featured in the "RIIO" approach to performance-based regulation (“PBR”) that is popular in Britain. The new benchmarking models for the OEB will be estimated with data on the operations of US power distributors and used to appraise the performance of Toronto Hydro-Electric System. Most Ontario power distributors operate under incentive ratemaking plans featuring price cap indexes with Inflation - X escalation formulas. The X factor for each company includes a "stretch factor" determined using an econometric cost benchmarking model previously developed by PEG Research. Toronto Hydro has argued that this model, which is estimated using only Ontario data, doesn't take proper account of its special operating conditions.
PEG Research is the leading expert witness on the productivity trends of energy utilities in the United States and Canada. These trends play a key role in many PBR plans. Here is a summary of our recent results presented in testimony and other recent publicly available reports.
|Industry||Productivity Growth Trend||Sample Period|
| ||U.S. Power Distributors O&M||1.51%||2002-2011|
|U.S. Power Distributors Multifactor||0.93%||2002-2011|
|Broad Northeast U.S. Power Distributors O&M||1.48%||2002-2011|
|Broad Northeast U.S. Power Distributors Multifactor||1.06%||2002-2011|
|Upper Northeast U.S. Power Distributors||0.56%||2002-2011|
|Ontario Power Distributors||-0.33%||2002-2012|
|New Zealand Power Distributors||1.21%||1999-2008|
|U.S. Gas Distributors||0.85%||1999-2010|
|Enbridge Gas Distribution||1.07%||2005-2010|
PEG Research personnel headlined a Chicago conference on "Alternative Regulation for Emerging Utility Challenges". Mark Newton Lowry, company President, chaired the conference and provided in-depth discussions of multi-year rate plans, revenue decoupling, capital cost trackers, and PBR in western Canada. Senior Advisor Larry Kaufmann discussed service quality PBR and recent developments in Ontario PBR. Senior Advisor Blaine Gilles discussed how PBR helped telecom utilities cope with emerging competitive challenges.
Dr. Lawrence Kaufmann, Senior Advisor to PEG Research, has been advising the Staff of the Ontario Energy Board on the review of Enbridge Gas Distribution's "Customized Incentive Regulation" application. In October 2013, Dr. Kaufmann prepared a report assessing the merits of the application, and recommended that it not be accepted in its current form. He also helped Board Staff prepare interrogatories in the proceeding and testified in February 2014 on his work. A Board Decision on the application is expected in the summer of 2014.
Mark Newton Lowry filed testimony on behalf of Commercial Energy Consumers of BC in the PBR proceeding of two British Columbia energy utilities. FortisBC (formerly West Kootenay Power) and FortisBC Energy (formerly Terasen Gas) had recently returned to cost of service regulation after years of operation under PBR. The BC Utilities Commission had stated a concern that they maintain a "productivity improvement culture". Both companies have proposed multi-year rate plans in which budgets for operation and maintenance expenses and routine capex would be escalated by inflation – X formulas. Large plant additions would be subject to certificates of public convenience and necessity and separate cost tracking. In his testimony, Dr. Lowry addressed appropriate designs for the O&M and capex escalator formulas and formulas for more conventional revenue cap indexes. He presented results of recent PEG Research studies of the multifactor productivity trends of US gas and electric power distributors.
The Ontario Energy Board ("OEB") issued its report on "Rate Setting and Benchmarking under the Renewed Regulatory Framework for Ontario's Electricity Distributors." This report sets out the Board's policies and approaches to incentive rate setting for electricity distributors and the benchmarking of electricity distributor total cost performance. The Report also includes the Board's determination on rate adjustment parameter values for multiyear rate plans in 2014.
Most Ontario distributors will continue to operate under price caps with Inflation – X formulas. In setting the X (aka productivity) factor, the Board relied on the estimates of industry multifactor productivity ("MFP") trends developed by Board Staff’s expert consultants, Dr. Lawrence Kaufmann and his team at PEG Research entitled “Empirical Research in Support of Incentive Rate-Setting: Final Report to the Ontario Energy Board.” The MFP of a large sample of Ontario power distributors was found to average a 0.33% decline annually. The Board also used the econometric model developed and recommended by Dr. Kaufmann to assign Ontario distributors to one of five efficiency cohorts, each of which is given a different stretch factor. PEG Research's econometric model, and distributors' stretch factor assignments, will be updated in each of the five years of the price cap incentive regulation plan. The inflation measure is a weighted average of an Ontario labor price index and the Gross Domestic Product Implicit Price Index for Final Domestic Demand.
Mark Newton Lowry filed supplemental testimony in September in support of a revised PBR proposal by Central Maine Power. The revision was prepared in response to a July decision by Maine’s Public Service Commission rejecting the general concept of a "hybrid" revenue adjustment mechanism ("RAM"). The hybrid RAM previously proposed by the Company required a multi-year forecast of its capital cost. CMP is now proposing a comprehensive revenue cap index based on research by Dr. Lowry on the input price and productivity trends of Northeast power distributors.
Mark Newton Lowry filed testimony in Massachusetts on behalf of Fitchburg Gas and Electric ("FG&E"), a Unitil utility. FG&E has for several years operated under a revenue decoupling plan that provides little revenue escalation between rate cases. FG&E has accordingly been compelled to increase the frequency of its rate cases. Dr. Lowry's testimony details two Altreg approaches that can provide revenue escalation and reduce the frequency of rate cases. One is a broad-based capital cost tracker similar to those that have been approved for several Ohio power distributors and Massachusetts Electric. The other is a PBR plan featuring a revenue cap index ("RCI"). The RCI was designed with the aid of research by PEG Research on the input price and productivity trends of Northeast power distributors. No PBR plan has been approved in Massachusetts since the implementation of decoupling several years ago.
Blaine Gilles, Senior Advisor to PEG Research, presented a paper entitled "New Regulatory Frameworks for Energy Distribution: Lessons from the Disruptive World of Telecommunications," at the Eastern Conference Advanced Workshop in Regulation and Competition sponsored by the Rutgers University Center for Research in Regulated Industries. The paper discusses how alternative regulation dealt with disruptive technologies in telecommunications and its implications for the energy distribution industry as it faces disruption from distributed energy technologies.
The Edison Electric Institute ("EEI") has released a new survey of trends in alternative regulation ("Altreg") in the North American energy utility industry. The report, entitled Alternative Regulation for Evolving Utility Challenges, was prepared by PEG Research under the direction of Eric Ackerman, EEI's Director of Alternative Regulation. Dr. Mark Newton Lowry, President of PEG Research, was the principal investigator on the survey. New developments in cost trackers, revenue decoupling, forward test years, multiyear rate plans, and formula rates are documented in the report. The survey covers important gas as well as electric precedents.
Interest in Altreg has increased in recent years as utilities struggle to cope with the financial attrition caused by slower growth in the volume of energy delivered per customer. Drivers of slower growth in average use have included sluggish economic growth, changing building codes and appliance efficiency standards, and the demand side management programs of utilities and state agencies. Load losses due to distributed energy resources are an emerging problem for some electric utilities. The survey found that all of the major approaches to Altreg have expanded in recent years. Of special note is the growing popularity of lost revenue adjustment mechanisms by electric utilities and the increasingly widespread use of multiyear rate plans ("MRPs") in Canada. Capital cost trackers have been popular with energy distributors engaged in accelerated system modernization. Several utilities have recently agreed to MRPs that combine a capital cost tracker with a rate freeze. To obtain a copy of the report from the EEI website click here.
Mark Newton Lowry, President of PEG Research, filed testimony in early May in support of a new Alternative Rate Plan for Central Maine Power. The new plan features a revenue decoupling mechanism that will help CMP contend with declining average use of power by its customers. Revenue decoupling is typically accompanied by a revenue adjustment mechanism ("RAM") that automatically escalates allowed revenue for inflation and other changes in business conditions. CMP is proposing a "hybrid" RAM design that features index-based escalation of the budget for O&M expenses and a forecast-based "stairstep" trajectory for the capital cost budget. Dr. Lowry's testimony included evidence on the O&M input price and productivity trends of Northeast US electric utilities. Hybrid RAMs have been used for decades by California utilities and are known for their flexibility in financing capital spending surges. Hybrid RAMs are currently used by Southern California Edison and the Hawaiian Electric companies.
Larry Kaufmann, a Senior Advisor to PEG Research, recently prepared rebuttal and surrebuttal testimony on behalf of the Wisconsin Public Service ("WPS"). Dr. Kaufmann testified on the value of reliability improvements to WPS customers which are expected to result from WPS' $222 million System Modernization and Reliability Project ("SMRP"). Dr. Kaufmann estimated that the value generated by the SMRP would recoup the program's costs in a maximum of 15 years.
On May 3, the Ontario Energy Board ("OEB") released a report from PEG Research titled "Empirical Research in Support of Incentive Rate Setting in Ontario". The report provides recommendations on three elements of the "fourth generation" index-based ratesetting mechanism that likely will apply to more than seventy power distributors in the most populous Canadian province: 1) an industry-specific inflation factor; 2) the productivity factor component of the X factor; and 3) the stretch factor component of the X factor. PEG Research used econometric and unit cost/peer group benchmarking methods to identify five "efficiency cohorts" of distributors within the Ontario electricity distribution industry. The productivity factor recommendation was based on TFP research using newly available Ontario data. Recommended stretch factors will differ among cohorts. Dr. Larry Kaufmann of PEG Research will answer questions on the PEG report and recommendations at a May 16th stakeholder meeting at the OEB. He will also participate in a May 27-28 stakeholder conference in which Board members will consider evidence from PEG and other stakeholders who may present alternate proposals.