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Executive Summary ....................................................................................................................................... 3

I. Overview and Rationale for a Regulator of Electric Service Providers Serving Puerto Rico ................. 6

A. Puerto Rico Would Likely Benefit from an Electricity Regulator ...................................................... 6

B. Overview of the Role of Government and a Power Sector Regulator Serving Puerto Rico.............. 7

C. Experience with Electricity Regulation ........................................................................................... 10

II. Counterpoint Argument to Address Concerns, Criticisms, and Myths Associated with Establishing a

Sector Regulator ......................................................................................................................................... 12

A. Creating an Empowered and Independent Regulator .................................................................... 12

B. Regulation Should Spur Productivity and Efficiency Improvement ................................................ 12

C. Regulation Should Spur Distributed Generation and Energy Efficiency ......................................... 13

D. Establishment of a Sector Regulator Should Encourage Participation of New Partners ................ 14

E. Regulation Will Help Manage Costs and Rate Increases, and Protect the Public Interest ............. 14

F. Implications of Poor Regulatory Design in Legislation .................................................................... 15

III. The Role and Responsibilities for an Electricity Regulator in Puerto Rico ...................................... 16

A. Setting Reasonable Rates ................................................................................................................ 16

B. Alternative : Establishing Performance-Based Rates to Provide Utility Incentives ... 19

C. Planning Requirements and Oversight: Integrated Resource Planning (IRP) ................................. 21

D. Reliability Standards and Service Quality ....................................................................................... 24

E. Consumer Protections .................................................................................................................... 25

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F. Procedures and Operation of the Commission ............................................................................... 27

G. The Role of a Regulator in the Advent of Competition ................................................................... 28

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IV. Cost and Design Considerations for the Creation of a Regulatory Commission ............................. 31

A. Size of the Regulatory Commission and Budget ............................................................................ 31

B. Considerations Regarding the Appointment of Commissioners ..................................................... 33

C. Scope of Commission Jurisdiction and Authority ........................................................................... 34

D. Hearings and Due Process at the Commission ............................................................................... 35

E. Regulatory Accountability ............................................................................................................... 38

V. Summary and Conclusions .................................................................................................................. 39

Appendix: Regulation Preserves Option Value for Later Reform ............................................................... 41

A. The Role of Regulation as a Cornerstone of Broader Sector Reforms ............................................ 41

B. Regulation Provides Opportunity for Later Reforms, if Warranted ................................................ 43

C. Legislation Should be Broad and Enabling ...................................................................................... 43

D. Creation of Competition Can Further Reduce Costs ....................................................................... 44

References .................................................................................................................................................. 45

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Decoupling is a tool that focuses on revenues over rates to ensure that the utility’s revenue requirements are met even if sales go down. Rates are adjusted periodically – usually annually to allow the utility to recover any revenue shortfalls or to refund to consumers any overpayment above the authorized revenue requirement established by the regulatory authority.

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