T&D Reliability: The Next Battleground in Re-Regulation

Fortnightly Magazine - March 1 1999
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PUCs turn their attention to what they can still control.

The battleground has shifted. Utilities that last year worried about winning customers in pilot programs for retail choice now face public audits on the reliability of transmission and distribution.

With rate cases in remission, no nukes on order and generation planning left to the market, public utility commissions are turning their attention to what they can still regulate. That means service quality. Nor are PUCs the only ones involved. In some states, public officials up for re-election are making political hay of each major outage and playing on fears of post-deregulation reliability meltdowns. Consumer advocates and watchdogs also are protecting their interests.

Beyond the posturing, however, lies a genuine policy issue. How should utilities balance cost-cutting with improved reliability? Any serious discussion of performance-based ratemaking, or PBR, cannot avoid this issue.

Rising Scrutiny

The pace of regulation for T&D reliability and service quality is accelerating (see figure, Increase in States with New Rules). A closer look (see Table 1, New Reliability Regulations by State) reveals two major causes:

public reaction to unusually severe outages; and

public concern about competition-induced cost cutting.

Mergers only exacerbate this acceleration in rules and regulations. Merger reviews may include a special focus on post-merger reliability. Even an internal but very public restructuring could lead to the same result.

Concern over severe Outages. While PUCs for years have allowed and even encouraged utility companies to report their outage data on a storm-adjusted basis for better trend-spotting, there is no surer way for a utility to invite scrutiny than by mishandling a major outage, especially in unusual cases. If the cause is familiar, like hurricanes or tornadoes in states prone to such calamities, the public appears more likely to be forgiving, but when an ice storm hits the Gulf Coast or a hurricane hits New England, then any problems in service restoration seem quicker to promote a reaction.

For example, New England utilities still provide their PUCs with an unusually large amount of reliability detail that began as a reaction to outages that followed hurricane Gloria in 1985. Another example is Entergy, which suffered from a triple-jeopardy situation when, in early 1997, on the heels of its acquisition of Gulf States Utilities in 1995 and with deliberation of a deregulation bill for Texas underway, an unusual ice storm hit the Texas Gulf Coast. The resulting public reaction spurred the Texas PUC to fine Entergy 60 basis points against return on equity (with an opportunity to earn half back) and to mandate a service quality assessment by an external auditor.

In short, expectations define performance. Storm response, then, must pay heed to this rule. Second, it is better to avoid regulatory problems than to fight them. As any utility knows that has a nuclear plant on the NRC's watch list, more money may be spent responding to auditors (and intervenors, whistleblowers, etc.) than on assuring performance in the first place.

Fear of Cost Cutting. Here, what is interesting is how the discussion confuses reliability with supply adequacy. Even when deregulation