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Universal Service: A Performance-Based Measure for Competitive Industry

Fortnightly Magazine - June 15 1998

in a performance-based ratemaking system, a utility should then be penalized for falling short of the outcome-based criteria and rewarded for exceeding them.

All five components of the universal service indicator - termination of service, payment agreements, money at risk, customers in arrears and weighted arrears - are necessary to measure performance. The individual scores are combined to derive the composite universal service measurement of a utility. These components allow for measurement without creating perverse incentives to pursue counterproductive collection strategies.

For instance, extending rewards for reducing arrears without creating penalties for increasing shutoffs would lead a utility to refuse to negotiate reasonable payment plans with those least able to pay. The utility would then follow with termination of service. The end sought, however, is not simply the reduction of arrears but rather the pursuit of universal service.

Similarly, creating an incentive for increasing the number of payment plans without penalizing high proportions of unaffordable plans would lead a utility to place customers on deferred payment arrangements without regard to the likely success rate those plans. The goal is not to get payment-troubled customers on deferred payment arrangements but to get them on affordable plans with a reasonable opportunity for success.

Applying the Model

The universal service indicator proposed here was applied to Pennsylvania's 14 electric and natural gas investor-owned utilities to determine how those companies have performed within the past eight years (see table).

Pennsylvania utilities can be divided into three categories: (1) those that maintained or improved service (scores of 20 to 25); (2) those with moderate problems maintaining service (scores of 13 to 16); and (3) those with substantial problems in maintaining performance (scores of 5 to 12).

Gas utilities were consistently better at maintaining their standards over time than electric companies. Only one of the six natural gas companies fell into the bottom tier, compared with five of the eight electric companies. Two of the six gas companies improved their universal service performance, compared with none the eight electric companies (although Penelec scored a 20).

Equitable Gas and National Fuel Gas were the only two companies that showed steady improvement from year to year. Equitable began with a 1990 score of 19 and built its score to 25 by 1995. Similarly, National Fuel Gas sank to a 14 in 1991, but steadily improved its score for the next three years before moderating in 1995.

West Penn Power and Metropolitan Edison maintained a high universal service score from 1990 through 1992. Both companies, however, experienced a substantial drop in 1993 from which they had not recovered by 1995. Indeed, each company saw a continuing decline in their scores beginning in 1993, indicating that the decline in universal service performance was not simply a one-year phenomenon.

Metropolitan Edison presents an interesting analysis. In 1990 and 1991, it had high scores across-the-board. In 1992, it experienced a significant drop in the termination component. In 1993, the drop showed up in the termination and weighted arrears components; and by 1995, it was evident in termination, money at-risk and weighted arrears components. In