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Ontario's Failed Experiment (Part 2)

Service quality suffers under PBR framework.

Fortnightly Magazine - August 2009

and interruptions on the transmission system, and on feeders used jointly with another utility... [T]he reliability indices reported by a utility should be adjusted so that they truly represent situations under its control.”

Therefore, as part of the original reliability indicator reporting requirements established in the first Distribution Rate Handbook , LDCs are required to record the reason for supply interruption, but not report this to the OEB. This requirement was continued in the 2006 Electricity Distribution Rate Handbook . The OEB should require LDCs to provide this data retroactively to 2000 so that the historical data available to the OEB can be used to determine how much of the degradation is outside the network and how much reflect interruptions that are within the LDCs’ ability to control. Both operational as well as regulatory governance remedies then need to be implemented and examined to see if they bring subsequent performance within mandated limits.

Standards and penalties have been shown to be effective in blunting the perverse incentives under IR. In the United States, Ter-Martirosyan found that utilities with IR, but without standards, reduce their expenditures by 37 percent throughout the time period of the analysis. On the other hand, utilities with IR and standards and penalties increased their expenditures in every year by 17 percent. The former utilities were found to have had a 64-percent increase in SAIDI and a 13-percent increase in SAIFI. The latter utilities were found to have had a 26-percent decrease in SAIDI and a 23-percent decrease in SAIFI.

In the long run, our preference in Ontario is to develop an incentive approach that internalizes the cost of supply interruptions so that LDCs can supply a socially optimal level of reliability. Such regimes have been successfully implemented by a number of European regulators. These efforts have been well documented; CEER is shortly due to release its fourth benchmarking report on such efforts among member countries. In the short run and in the absence of such an incentive regime, Ontario’s distributors should face financial penalties for noncompliance with mandated minimum-reliability standards. After all, the OEB itself stated that by 2003 it would be in a position “to set industry service quality performance standards. Once these standards have been established, PBR incentive mechanisms with economic consequences will be introduced around the service quality indicators” ( 2000 Handbook, p.7-10 ). Now, in 2009, the OEB should follow through on its decade old promise. Hopefully, it’s not too late.

 

Endnotes:

1. Report of the OEB Performance Based Regulation Implementation Task Force , May 18, 1999.

2. OEB, Service Quality, 2000 Electric Distribution Rate Handbook , March 9, 2000, p. 7-10.

3. Service Quality Regulation for Ontario Electricity Distribution Companies: A Discussion Paper, Ontario Energy Board staff, Sept. 15, 2003 (downloaded from http://www.oeb.gov.on.ca).

4. Staff Discussion Paper , Regulation of Electricity Distributor Service Quality (Board File EB-2008-0001), Jan. 4, 2008.

5. Ofgem, 2006/07 Electricity Distribution Quality of Service Report , Oct. 31, 2007, p.1.

6. CEER, Third Benchmarking Report of Quality of Electricity Supply, 2005, p.31.

7. Another appropriate metric would

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