After 10 years of incentive regulation, reliability has declined in Ontario. Regulators failed to enforce service-quality standards, and consumers are suffering as a result.
Ontario's Failed Experiment (Part 2)
Service quality suffers under PBR framework.
[Editor’s note: Fortnightly published Part I of this article in the July 2009 issue. In that installment, the authors described how the Energy Competition Act in 1998 restructured Ontario’s utilities and charged the Ontario Energy Board with implementing performance-based ratemaking (PBR) to maintain service quality. The author asserts that despite the board’s intentions, however, service quality has declined in the province.]
The Ontario Energy Board’s (OEB) experience with service quality regulation (SQR) of electric distributors has its origins in the OEB’s 2000 Electricity Distribution Rate Handbook . In terms of SQR, this document largely was based on the Implementation Task Force Report’s 1 recommendations.
Survey work by the task force found that more than 60 large and medium utilities covering over 80 percent of distribution customers had been collecting historical reliability data. However, a number of smaller utilities, some with only hundreds of customers, didn’t have historical data. In the end, for a variety of reasons, the task force recommended that only minimum customer-service standards be applied to the LDCs during the first generation. The levels of the minimum standards were determined through a survey of the LDCs. For reliability, the “standards” actually are weaker: For those LDCs with historical data, those LDCs should keep their performance within the range of whatever it had been during the preceding three years. The task force noted: “The OEB will review the PBR submissions to ensure compliance with the established benchmarks.” Those LDCs without reliability data should begin to collect it. The task force recommended that the latter utilities’ benchmarks be set by using peer-group averages.
However, despite the reluctant acceptance of the lowest common denominator for SQR by the implementation task force, the general expectation was that the OEB would move quickly, possibly even early in the first generation, but no later than the beginning of the second generation following the initial three-year PBR term, to set reliability-performance targets based on a more reasoned and judicious rationale than “just do whatever it was that you were doing.”
Indeed, the principles of just and reasonable rates would require that service quality and reliability standards be explicitly formulated as part of the sale of access by distributors to customers. And, the OEB itself stated its intent to move expeditiously: “Upon review of the first year's results, the OEB will determine whether there is sufficient data to set thresholds to determine service degradation for years 2 and 3.” 2 Unfortunately, it’s now 2009 and the same nominal standards that applied in 2000 still apply today. As interpreted by some LDCs, however, the standards actually are lower today than in 2000.
In its initial PBR rate setting guidelines, the OEB spelled out the reasoning behind the standards:
…the Board’s approach to encourage the maintenance of service quality during the first generation PBR plan is to apply minimum standard guidelines for customer