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Ontario's Failed Experiment (Part 1)

Reliability declines after 10 years of incentive regulation.

Fortnightly Magazine - July 2009

Electric distributors produce and sell a multi-dimensional output to their customers. Clearly, the customer service, reliability and voltage quality, among others, can vary substantially, producing different products depending on the mix of characteristics delivered to the customers. These different bundles of characteristics likely would have different costs associated with them and thus different prices. Evaluating the reasonableness of a distributor’s price must consider the context of the whole package (or packages) being delivered to customers.

Regulators usually have responsibility to ensure that regulated prices such as electric distribution are just and reasonable. But, most energy regulators have an associated, dual responsibility toward consumers. In addition to ensuring prices are just and reasonable, they also must ensure the appropriate levels of service and reliability are delivered. Without the latter, there can be no assurance that the prices being paid are, in fact, just and reasonable.

Sometimes, these fundamental responsibilities can be overlooked in the pursuit of more glamorous issues, or just through the passage of time. This point was noted by Elizabeth A. Noël, Esq., the District of Columbia’s people’s counsel, in her April 2009 Fortnightly letter to the editor, “ Regulate First, Innovate Second ,” as quoted in part:

Commissioner Rick Morgan of the Public Service Commission for the District of Columbia based his article, “ Rethinking ‘Dumb’ Rates ” (March 2009, p.34), on the faulty premise that there is a consensus, either in the regulatory community or electric industry, or both, trending toward the immediate adoption of smart meters and dynamic rates…. The change to AMI and dynamic rates, etc., is not mandated by law. Rather, District of Columbia law requires public utilities to provide safe, adequate and reliable service to consumers at rates that are just, reasonable and nondiscriminatory. As a sitting commissioner on the Public Service Commission, surely Commissioner Morgan knows his first responsibility is to address why there have been more than 2,700 sustained electric outages in 2008 (179 in January 2009). With multiple open dockets investigating Pepco’s quality of service, rates and infrastructure, etc., his touting new rate designs and dazzling technologies, all the while ignoring the basics of requiring the local monopoly distributor of electricity to provide safe, adequate and reliable service, defies logic. It goes without explanation, fundamentals come first!...While AMI and a new rate design are sexy and way more interesting than downed wires, outages, exploding manholes and aged infrastructure, AMI and new rate design will not fix the problems this city is experiencing! The Commission first needs to address the aging and broken electric infrastructure plaguing D.C…

Firms can optimize only those costs internal to their cost structure, typically capital and operations, maintenance and administration (OM&A). Costs borne by customers due to the utility’s interruptions generally aren’t considered by a utility when deciding capital and OM&A budgets. In general, failure to recognize

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