The High Price of Poor Performance

Many of the utility engineers, operating personnel and industry technical consultants I meet on my travels believe reliability levels will suffer as a result of open access and competition. They point to the western United States blackouts in July and August 1996 as prime examples of decreasing reliability. As an engineer, I also feel uncomfortable with the direction our industry has taken and the ultimate ramifications these changes will impose on system reliability.

Several U.S. state commissions are so concerned with reliability that they are introducing performance-based penalties that fine utilities for poor performance. What better way to catch your attention than to hit you where it hurts: in your wallet? Although this approach doesn't directly address the technical issues facing the industry, it does force industry technical personnel to develop innovative solutions to maintain current reliability levels.

If you think that performance-based rate (PBR) measures are a passing fad, think again. Several U.S. states are discussing the issue or have introduced PBR measures through various utility commission rulings. If you think that PBR measures can be viewed as optional goals and that missing target levels will have little consequence, think again. State regulatory groups have designed penalty mechanisms with fines that can reach well into the tens of millions of dollars.

In January, the Public Utility Commission (PUC) of Texas slapped Entergy Gulf States with a rate reduction for poor service. The commission found that service problems related to an ice storm in January 1997 were so severe that they had to be addressed. The final amount of the rate reduction has yet to be calculated, but it could reach as much as US$4 million a year. Entergy Gulf States can earn back half of the reduction if it meets performance benchmarks, including a reduction in the frequency and duration of power outages, upgrading the worst-performing power lines and improving customer service functions such as call center waiting time, billing errors and streetlight repair.

The Oregon Public Utility Commission recently initiated service quality measures as part of its approval of the Portland General Electric and Enron merger. Eight measures addressed specific maintenance programs, reliability indices and employee safety. Although penalties are not associated with the three maintenance programs, four of the five annual performance measures do site specific cost penalties for poor performance. A tiered penalty structure, ranging from US$100,000 to US$1,000,000 per measure, has been setup for the reliability indices SAIFI, SAIDI and MAIFI. In addition, poor safety records could subject the utility to fines in the range of US$100,000 to US$500,000. As part of the commission's review and final approval of Pacific Power's request for an alternative form of regulation, they too can expect to face similar performance measures and penalty schemes.

As part of an Electric Restructuring order issued in May 1996, the New York Public Utility Commission required electric utilities in the state to address performance standards when they filed their respective restructuring plans. The commission has since set PBR measures for each utility based on past performance in the areas of service reliability and customer service. More specifically, the service reliability standards cover the frequency and duration of outages as well as power quality. The customer service standards include customer satisfaction surveys, customer complaint rates and low income customer enrollment information. The consequence of not meeting the new performance standards is substantial. Niagara Mohawk, for example, could face maximum revenue penalties of more than US$20 million for not meeting its performance standards-not a pleasant thought if you are trying to maintain competitive rates.

In Massachusetts, PBR measures were introduced in a 1996 docket by the Massachusetts Department of Public Utilities. The performance measures in this state are being set on the utilities' historic levels of reliability, customer service and safety. In response to the commission's new directives, Eastern Utilities Associates has initiated programs to improve performance in measured standards such as system average interruption frequency index (SAIFI), system average interruption duration index (SAIDI), call-center response rates and safety performance based on lost-time accidents per 100 employees.

If you're in the business of distributing electricity, you better pay attention to the changing state regulatory landscape. Performance-based regulation is here to stay. PBR measures will require that a utility's reliability indices and customer service ratings remain at current levels or improve. Every employee in our industry will be affected by this new regulatory stance. Assuming that the work you're involved with at your utility has a direct connection with customer service and reliability (I'd be worried if it doesn't), you better pay attention to these new regulations. As designers and operators of the network, your actions will, in some form or fashion, affect the performance measures being tracked

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