Managing the risk of performance based rates

A profound consequence of deregulation is the emergence of performance based rates (PBRs). PBRs are contracts that penalize and/or reward a utility based on system performance. These contracts can be based on average system reliability, or can be based on individual customer reliability. In either case, utilities are exposed to financial risk due to the uncertainty of system reliability. This paper presents a method of assessing the uncertainty of system reliability and discusses how to use this information to manage PBR risk. This method can be used to negotiate a fair PBR, to compute the expected financial impact of a PBR, and to make design decisions that maximize profits while minimizing risk.