(August 2011) Economic consultant Michael Rosenzweig challenges Constantine Gonatas’s proposal for ensuring FERC’s demand response rulemaking achieves its objectives. Also, Juliet Shavit...
Ontario's Failed Experiment (Part 1)
Reliability declines after 10 years of incentive regulation.
such customer interruption costs leads to little spending on reliability.
Over the past decade or so, regulators have moved to implement incentive regulation (IR). The shift to IR can put OM&A costs directly in conflict with the pursuit of profit during the plan’s term. Cost reductions experienced earlier in a plan’s term are worth more to a utility than cost reductions achieved in later years. Since capital might not be subject to significant changes within the earliest years of a plan’s term, the utility could be incented to cut OM&A expenses beyond what is prudent for the quality and reliability of the network. Injudicious curtailments in OM&A have been shown to significantly lower local distribution company (LDC) reliability.
In the United States, few studies have examined distribution reliability. Six years ago, one study examined the effects of incentive regulation on OM&A expenses and service results. A. Ter-Martirosyan of George Washington University examined the effects of IR on electricity distributors’ OM&A and quality of service. 1 The author uses 1993 through 1999 data from 78 major U.S. electric utilities from 23 states. Ter-Martirosyan finds that IR is associated with a reduction in OM&A expenditures. These reduced OM&A activities are then associated with an increase in outage duration. Importantly, Ter-Martirosyan’s analysis concludes that incorporating strict reliability standards with financial penalties into IR can offset the tendency of plans without standards and penalties to imprudently cut critical OM&A activities.
Incentive Regulation and Service Quality Standards
Possibly, due to these perverse service quality results, it’s not uncommon for utilities under IR to have explicit and strict service quality standards, often with penalties for violations. Indeed, Ter-Martirosyan finds that over half of the utilities in the sample with IR had such penalties.
Regulators in both North America and Europe have responded to profit-driven OM&A cuts with new regulatory initiatives. Among the former, following a series of significant outages often caused by imprudent reductions in OM&A expenses, some regulators have imposed on the utilities mandates covering inspection and maintenance, and sometimes investment, which specify the nature, timing and, in some cases, the money and staffing necessary to fulfill the regulations. In Europe, such regulators as the Council of European Energy Regulators (CEER) have documented and encouraged the adoption of service and reliability quality regulation (SQR) among its two dozen member jurisdictions. CEER’s SQR combines system-wide standards with incentive and penalty schemes as well as single-customer guarantees with monetary payments for nonperformance. Some regulators have used willingness to pay (WTP) studies to gauge the value customers place on reliability and the amount they would be willing to pay for service improvements or interruption avoidance. 2
In North America, however, publicly available research on reliability performance is scarce. Whether it be a single LDC over a long period, multiple LDCs at one point in time, or most difficult of all, a number of LDCs over a long period, little data exists to gauge the state, trend and compliance issues regarding reliability. Ter-Martirosyan’s U.S. study was based on data that is now more than a decade old. However, there is one