Energy regulation and quality of service

1
Energy regulation and quality of service

• Eric Groom
• FEU, World Bank
• 4th Poverty Reduction Strategy Forum
• Athens, June 26-27 2007

2
Outline

• The role of the regulator
• Price regulation and quality of service
• Why does quality of service matter?
• Issues in setting quality of service targets
• Choosing the measures
• Setting the target
• Monitoring and benchmarking
• Creating incentives
• Incentives and government-owned utilities

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Scope and role of economic regulation
Economic
Prices to reflect
resource costs

may be higher or
lower
Policy
Fiscal
Consumer
Consumer
Safety
Safety
Protection
Protection
Ownership
e.g. Drinking
e.g. Electrical
e.g. Consumer
e.g. Consumer
Regulation
Water
Safety
Standards
Complaints
Standards
Complaints
Monopoly
Monopoly
Legal Control on
Firm Behavior
e.g. Emission
e.g. Effluent
e.g. Service
e.g. Service
Discharge
Discharge
Coverage
Coverage
Standards
Standards
Social Objectives
Environmental
Social Objectives
Environmental

Core Definition
the rules and institutions which set, monitor,
enforce and chang
e maximum allowed
tariffs and minimum allowed services standards
for provide
rs
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Functions of economic regulators in practice

• Wide range of functions of economic regulators
  in practice some, for example, are
• extensively involved in sector policy and reform
• Setting social policy through tariff design
• Technical regulators as well (eg safety)
• Consumer advocates and/or resolve disputes
• Environmental regulators
• Good reason to be wary of broadly defined
  functions
• Can confuse accountabilities, roles, and
  relationships with Government and stakeholders

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Prices and quality of service

• Price and quality go hand-in-hand
• Cost of service for user depends on quality as
  well as price
• Poor quality gt higher cost to users through loss
  of supply and production, spending on backup
  equipment and alternative sources, damage to
  equipment
• Quality of service affect costs higher quality
  gt higher costs
• Eg network planning criteria, level of generation
  reserves
• And customers do not want to pay for unreliable
  ad poor quality power

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Quality regulation is becoming more important

• Recent review of Banks support for regulation
  highlighted that quality of service was given too
  little attention
• Old-style rate-of-return promoted excessive
  quality in principle through excess
  investment
• Price cap gt stronger efficiency incentives
• But cutting costs may mean cutting quality
• And incentive to game capex forecasts

7
Service standards and setting pricesthe
standard regulatory process
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Poor quality the rule, not the exception -
examples from Africa
Antonio Estache Sergio Perelman Lourdes
Trujillo, 2005. "Infrastructure Performance and
Reform in Developing and Transition Economies,"
Policy Research Working Paper Series 3514, The
World Bank.
9
Impact of reliability on power costs examples
from Africa
Source WB draft not for quotation or citation
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Setting Quality what matters for customers

• Customers want
• Reliable supply so that they know it will be
  available when they want it
• Stable voltage and frequency so that their
  equipment works and is not damaged
• Good customer service e.g. queries answered,
  timely connection, information, fair resolution
  of disputes
• But what quality customers want varies between
  customers and is difficult to assess
• Most likely wealthier customers and sophisticated
  businesses want higher quality
• In the extreme eg lengthy blackouts at any time
  on most days all customers want better service
• But what if power is available most of the time
  and interruptions are short who benefits from
  further improvements and how much should we pay?

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Measuring reliability and quality

• Most focus is on reliability
• Easier to measure and important
• Most common measures
• SAIFI Frequency of interruptions per customer
• SAIDI Average time that customers are
  interrupted
• CAIDI Average duration per outage
• ENS Energy not supplied
• But measures are not standard e.g.
• Minimum outage times and momentary interruptions
• Planned or unplanned
• Adjustment for storms
• Estimation of customers affected

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Regulatory Instruments

• Public reporting of performance
• Minimum standards
• Overall standards for average performance
• Penalties levied paid to government
• Guaranteed standards for individual customer
  performance
• Penalties paid to customer
• Incentive schemes
• Revenue cap or prices linked to reliability and
  service quality

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What reliability level

• Strong benefits if reliability is very poor
• But beyond that little hard data on benefits in
  developed or developing countries
• Guides could come from
• Historical performance small incremental steps
• Benchmarking performance
• Observed costs
• Consumer survey
• Key problems in setting price-quality trade-off
• Customers in an area (mostly) all get the same
  quality
• But customers value quality/reliability
  differently
• And cost for a given level of reliability vary by
  region
• Higher cost of quality in poor areas?

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Incentives and Government-owned utilities

• What incentives (if any?) work best for
  government owned utilities
• key issue is what drives managers
• and how effective are the governance regimes
• Financial penalties are often problematic
• Are managers driven by financial outcomes?
• Who pays anyway? Penalties ultimately fall on
  the government budget and taxpayers and users
  of government services

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Incentives and Government-owned utilities

• Reputational publication of poor performance
  incentives may be effective
• Managers do value their reputation and their
  organizations reputation
• Hence transparent reporting may be effective,
  but
• May raise political sensitivities especially if
  there is not strong accountability of managers

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Thank you.

• Eric Groom
• 1 202 458-8558
• egroom_at_worldbank.org
• www.worldbank.org