(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 2)
Service quality suffers under PBR framework.
for three years now, the Board considered it timely to review the SQIs and to further develop service quality regulation applicable to electricity distributors…
The notice listed the issues for review: review of the existing service quality indicators; consideration of additional or replacement indicators; the frequency and the periodicity of reported performance; defining degraded service and regulatory responses to service degradation (remedial action reports, possible financial consequences); urban and rural, large and small, and other distinctions in reporting or standards; and, the form and purpose of service quality audits in a comprehensive SQR plan (remedial plans and financial rewards or penalties).
Subsequently, Ontario Energy Board staff released a paper, “Service Quality Regulation for Ontario Electricity Distribution Companies” (2003 staff report). Importantly, an associated staff discussion paper reaffirmed the link between quality and rates: just and reasonable rates must consider the quality of the service provided: “Service quality regulation is integral to economic rate regulation, to setting ‘just and reasonable’ rates. From the perspective of the users or customers of the service, there must be a consideration of the ‘value’ of the product or service, where value is defined as the product or service meeting or exceeding the needs and expectations of customers relative to the price charged.” 3
The 2003 staff report noted under cost of service (CoS) regulation, firms’ incentives weren’t at odds with service quality because they earned a return on investments and prudent and necessary costs were passed along to the customers. The staff discussion paper noted that under CoS the review process was usually annual, and embedded a review of service quality and reliability.
“ …Such reviews occurred periodically—often annually. Service quality could be reviewed as part of the revenue requirement and rate application, with consideration of how existing operational expenses and planned capital investments would contribute to the maintenance or improvement of service quality. Poor service quality could also be a factor considered by the regulator in reducing the allowed revenue requirement (without exacerbating the situation by the utility cutting costs and services in response to reduced revenues)…Also, the ‘rate base’ concept of CoS regulation, some argue, provides an incentive for the firm to overinvest and provide ‘gold-plated’ service, and so service degradation is thus seen as less of a risk under CoS regulation.”
Commenting on PBR, the 2003 staff report noted that differing incentives might result in cost containment degrading service. Under PBR, the OEB staff noted a greater need for ongoing monitoring of service performance:
“… PBR differs from CoS in that it provides incentives for a firm to improve its productivity … Another advantage to PBR is … less frequent detailed reviews … With less frequent detailed reviews, there is an increased need for ongoing monitoring of service performance, to ensure that any problems that do occur are addressed … Also, the incentives inherent in PBR … could result in … degraded service. Service quality monitoring serves as a counterbalance to ensure that adequate service is maintained … In some PBR plans … the service performance of the firm may be a parameter affecting