The Simple Analytics of Performance-Based Ratemaking: A Guide for the PBR Regulator

Professor Navarro discusses and evaluates the use of Peformance-Based Ratemaking ( PBR ) as a substitute for traditional Rate Base Regulation ( RBR ) in determining the rates which regulated industries may charge to their customers. After discussing the importance of PBR from a theoretical perspective, the author analyses a California case study involving the first comprehensive application of PBR to the regulation of base rates. Next, the author examines the basic premises of PBR, focusing on the criticisms of traditional RBR. This is followed by a discussion of the mechanics of PBR both in theory and with respect to the California case study. The Article goes on to consider the use of PBR in both one-period and multi-period contexts, and finishes with an evaluation of the potential success of PBR as a regulatory alternative. The author concludes that PBR is unlikely to be a panacea for the ills of traditional RBR, and that its potential success rests in large part on its application, design, and implementatio