#BTSpeakingOut – Time for a new regulatory compact

Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.

by Tony “Kite” Gibbs

Disruptive elements are creating unprecedented changes in the electric industry. Expansion of distributed energy resources (DER’s), demands for decarbonisation, the need for greater grid resiliency and reliability, and the advent of digitalisation are major drivers of these changes.

Locally, BL&P is responding to these developments with programs aimed at grid modernisation and a clean-energy transition.

Policymakers, on the other hand, are planning a major market restructuring that will split the vertically integrated industry into five new market segments.

These include generation, energy storage, wires, grid management and sales. While these stakeholders’ actions are all timely and necessary, they do not go far enough. One central component that is missing from their broader plans is the reform of the current utility business and regulatory model.

A business model is essentially a revenue logic that delivers value to customers, encourages customer to pay for that value, and converts payments into profits.

Utility tariffs and business models are mutually interdependent. The monopoly model of our power grid has been eroded by DER’s and yet, the cost structure and regulatory principles that underpin it still remain.

No doubt, this situation will limit its ability to serve the needs, expectations and aligned interests of the utility and its customers alike.

The current model is a cost-based and backward-looking approach that focuses on pricing inputs rather than outputs. It incentivises capital expenditure (CAPEX) and throughput of energy rather than conservation and energy efficiency.

These attributes, unfortunately, give rise to features of regulatory lag and information asymmetry that present difficulties for regulatory prudence and timely cost-recovery. Difficulties that are exacerbated in the present environment of capital-expansion and declining load-growth.

The task of maintaining financial viability under these circumstances will be a significant challenge for BL&P, especially as it embarks on its clean energy transition.

It will require a new regulatory compact, one that departs significantly from the cost-plus mechanisms of cost-trackers that the utility currently favours.

These tariffs, an addition to the 11.9 per cent requested rate increase, are designed to effect the timely recovery of the revenue-requirement deficit brought about by the clean energy expansion programme.

However, while these mechanisms may be initially beneficial to the utility, they will place a significant and unbearable financial burden on to rate payers and ultimately create sustainability issues going forward.

The financial climate does not portent favourably for utility or stakeholders and this may affect pending capital investment.

This will ultimately drive the need for a different regulatory approach. Within recent times, utilities facing similar circumstances have been turning to performance-based regulation (or PBR) coupled to multi-year plans as
an alternative to cost-of-service regulation.

Much of the excitement for implementing this new business and regulatory model comes from the experience and successes of the United Kingdom.

There regulators introduced this framework which incentivises the utility to adopt a different approach to earning revenue; one that is tied to the achievement of performance metrics, delivery of outputs and innovation, and which decouples revenues from CAPEX.

This is the direction that many regulators and utilities are heading today as a result of flatter demand, stricter emission regulations, and greater cost competition from DER’s.

The island grids of Jamaica and Hawaii have already made the regulatory transformation with some success and its time that we follow suit.