QUALITY OF SUPPLY REGULATION: PRINCIPLES AND METHODS Roberto Malaman

1. QUALITY OF SUPPLY REGULATION: PRINCIPLES AND METHODS Roberto Malaman Autorità per l’energia elettrica e il gas (Italy) and Chairman – CEER WG Quality of Supply Budapest – November 2003 This presentation is not an AEEG or CEER official document

2. INTRODUCTION • CUSTOMER WELFARE IS AFFECTED BY BOTH PRICE AND NON-PRICE ISSUES • REGULATORS ARE IN CHARGE OF INSURING THAT APPROPRIATE QUALITY IS DELIVERED TO CUSTOMERS

3. WHAT IS QUALITY OF SUPPLY? …. Quality is the primary empirical reality of the World… (Robert M. Pirsig, Lila, 1991) QUALITY OF SUPPLY IS WHAT CUSTOMERS REALLY RECEIVE AGAINST THE BILL THEY PAY

4. CUSTOMER SATISFACTION IS STRONGLY AFFECTED BY QUALITY LEVELS(ITALIAN REGIONAL FIGURES)

5. SECURITY DEPOSITS • TOOLS FOR PAYING BILLS • NON PAYMENT HANDLING • DISCONNECTIONS FOR DEBT • COMPLAINTS • READING AND BILLING • (METERING) CUSTOMER SERVICE ISSUES SUPPLY • NEW SUPPLY ESTIMATES • CONNECTIONS TO NETWORK • PROVING SUPPLY • RICONNECTIONS AFTER NON-PAYMENT DISCONNECTIONS • APPOINTMENTS • VOLTAGE AND METERS INVESTIGATIONS COMMERCIAL QUALITY ELECTRICITY SERVICE DISTRIBUTION CONTINUITYOF SUPPLY • LONG, SHORT AND TRANSIENT NON PLANNED SUPPLY INTERRUPTIONS • PLANNED SUPPLY INTERRUPTIONS OTHER PARAMETERS OF POWER QUALITY MAIN QUALITY FACTORSElectricity Service • VOLTAGE LIMITS • VOLTAGE DIPS • HARMONICS • FLICKER

6. PRICE REGULATION AND QUALITY REGULATION • PRICE REGULATION INVOLVES INCENTIVES FOR QUALITY OF SUPPLY • PRICE REGULATION WITHOUT QUALITY REGULATION MAY GIVE UNINTENDED AND MISLEADING INCENTIVES TO QUALITY LEVELS • RATE OF RETURN REGULATION  INCENTIVE TO OVER-INVESTMENT (AVERCH-JOHNSON OVER-CAPITALISATION EFFECT, OR INCENTIVE TO “GOLD-PLATED” SERVICES) • PRICE CAP REGULATION  QUALITY EXPENDITURE REDUCTION CAN BE USED TO CUT COSTS AND INCREASE PROFITS • UTILITY REGULATION SHOULD EXPLICITLY INCLUDE QUALITY TARGETS, EXPECIALLY AFTER UTILITIES PRIVATIZATION

7. TOTAL SOCIAL COST Costs I C Quality q Optimum level K THE OPTIMAL QUALITY LEVEL

8. PRINCIPLES FOR QUALITY REGULATION (1) • QUALITY IS MULTIDIMENSIONAL • REGULATORS SHOULD SELECT RELEVANT QUALITY FACTORS IN EACH COUNTRY • DIFFERENT INSTRUMENTS SHOULD BE USED • QUALITY MONITORING AND REGULATION SHOULD FOCUS ON THOSE DIMENSIONS OF SERVICE WHICH ARE • IMPORTANT TO CONSUMERS (SURVEYS) • CONTROLLABLE BY FIRMS (RESPONSIBILITY) • MEASURABLE BY REGULATORS (RULES) • QUALITY REGULATION CAN BE FOCUSED ON • INPUTS (ENGINEERING SOLUTIONS) • EXPENDITURE (INVESTMENT AND OTHER COSTS) • OUTPUTS (THE CONSEQUENCE ON THE CUSTOMERS)

9. PRINCIPLES FOR QUALITY REGULATION (2) • REGULATION FOCUS IS SHIFTING TOWARD OUTPUTS • REGULATORS SHOULD AVOID TO FORCE TECHNICAL SOLUTIONS OR DECIDE INVESTMENT PLANS • QUALITY STANDARDS SHOULD REFLECT USERS’ PREFERENCES AND REQUIREMENTS (WILLINGNESS TO PAY FOR QUALITY) • FOCUS ON INPUTS IS WELCOME IF OUTPUTS ARE NOT EASILY MEASURABLE/CONTROLLABLE

10. PRINCIPLES FOR QUALITY REGULATION (3) • STANDARDS SHOULD EMBODY SOME DEGREE OF REALISM (A CONSULTATION PROCESS HELPS) • QUALITY STANDARDS ARE USUALLY PERIODICALLY MODIFIED (PRICE-QUALITY REVIEW) • STANDARDS REVISIONS SHOULD TAKE INTO ACCOUNT: • SHIFTS IN MARGINAL COSTS (TECHNOLOGICAL CHANGE + PRODUCTIVITY INCREASE) • AND IN MARGINAL BENEFITS (CONSUMERS PREFERENCES)

11. MAIN INSTRUMENTS FOR QUALITY REGULATION (1) • GUARANTEED (INDIVIDUAL) STANDARDS (TO GUARANTEE A MINIMUM QUALITY THRESHOLD TO EACH SINGLE CUSTOMER) • COMPENSATION PAYMENTS (IF GUARANTEED STANDARDS ARE NOT MEET) • OVERALL STANDARDS (TO GUARANTEE A MINIMUM QUALITY THRESHOLD TO THE AVERAGE OF CUSTOMERS) • LEAGUE TABLES (BENCHMARKS) PUBLICATION OF QUALITY PERFORMANCE (ACTUAL LEVELS) OR YARDSTICK COMPETITION • INCENTIVE/PENALTIES MECHANISMS (SANCTIONS) • QUALITY-REVENUE OR QUALITY-TARIFF LINKS

12. LICENCES • CONTRACTUAL RULES • CODES OF CONDUCT CUSTOMER SERVICE ISSUES SUPPLY • QUALITY LEVELS COMPARATIVE PUBLISHING • GUARANTEED STANDARDS • OVERALL STANDARDS • CUSTOMER COMPENSATION FOR VIOLATION COMMERCIAL QUALITY GAS OR ELECTRICITY SERVICE DISTRIBUTION SAFETY AND CONTINUITYOF SUPPLY • COMPARATIVE PUBLISHING • GUARANTEED STNDARDS • OVERALL STANDARDS • QUALITY-REVENUES OR QUALITY-TARIFFS LINKS • TECHNICAL RULES POWER QUALITY/GAS COMPOSITION MAIN INSTRUMENTS FOR QUALITY REGULATION (2) • COMPARATIVE PUBLISHING • TECHNICAL RULES • ECONOMIC INCENTIVES (?)

13. REGULATORS APPROACH • FROM COMPANIES’ DECISIONS TO REGULATION • DIFFERENT INSTRUMENTS FOR DIFFERENT QUALITY FACTORS • MIX OF ECONOMIC AND TECHNICAL REGULATION • QUALITY STANDARDS ARE USUALLY REVIEWED ACCORDING TO PRICE REVIEW PERIODS • MORE COMPETITION LESS QUALITY REGULATION

14. CEER WORKING GROUP ON QUALITY OF SUPPLY: OBJECTIVES • COMPARE STRATEGIES FOR DESIGNING AND IMPLEMENTING QUALITY OF SUPPLY REGULATION • IDENTIFICATION AND SELECTION OF COMPARABLE INDICATORS/STANDARDS • BENCHMARKING STUDY ON QUALITY OF SUPPLY • POSSIBLE RECOMMENDATIONS FOR QUALITY OF SERVICE BENCHMARKING • 2001 AND 2003 REPORTS ON WWW.CEER-EU.ORG

15. CEER WORKING GROUP ON QUALITY OF SUPPLY: 2002-2003 ACTIVITIES • COMPARE STRATEGIES FOR DESIGNING AND IMPLEMENTING QUALITY OF SUPPLY REGULATION • BENCHMARKING STUDY ON QUALITY OF SUPPLY • ENLARGING THE SCOPE OF COMPARISON TO PUBLIC SERVICE OBLIGATIONS • THE FUTURE: JOINT ACTIVITIES WITH EU ACCESSION COUNTRIES

16. COMMERCIAL QUALITY REGULATION

17. CUSTOMER SERVICE ISSUES SUPPLY • NEW SUPPLY ESTIMATES • CONNECTIONS TO NETWORK • PROVING SUPPLY • RICONNECTIONS AFTER NON-PAYMENT DISCONNECTIONS • APPOINTMENTS • VOLTAGE AND METERS INVESTIGATIONS COMMERCIAL QUALITY SERVICE DISTRIBUTION CONTINUITY/SAFETYOF SUPPLY OTHER TECHNICAL PARAMETERS MAIN QUALITY FACTORSElectricity and Gas Services

18. COMMERCIAL QUALITY MAIN FEATURES • COMMERCIAL QUALITY IS ASSOCIATED TO TRANSACTIONS BETWEEN COMPANIES AND THEIR NEW OR EXISTING CUSTOMERS • TRANSACTIONS ARE IMPLICITLY PURCHASED WITH THE PRODUCT ITSELF • THERE ARE BOTH REGULAR AND OCCASIONAL TRANSACTIONS • SOME QUALITY FACTORS RELATED TO TRANSACTIONS CAN’T BE MEASURED (EX.: PERSONNEL BEHAVIOUR) • THERE IS A BROADLY SIMILAR APPROACH TO THE TYPES OF INDICATORS USED TO DEFINE COMMERCIAL QUALITY • GUARANTEED AND OVERALL STANDARDS ARE USUALLY INTRODUCED

19. COMMERCIAL QUALITY: MAIN TRANSACTIONS BETWEEN COMPANIES AND USERS

20. COMMERCIAL QUALITY STANDARDS IN SOME EUROPEAN COUNTRIES

21. PENALTY PAYMENTS * some standards in GB must be claimed

22. CONTINUITY OF SUPPLY REGULATION

23. CUSTOMER SERVICE ISSUES SUPPLY COMMERCIAL QUALITY ELECTRICITY SERVICE DISTRIBUTION CONTINUITYOF SUPPLY • LONG, SHORT AND TRANSIENT NON PLANNED SUPPLY INTERRUPTIONS • PLANNED SUPPLY INTERRUPTIONS OTHER PARAMETERS OF POWER QUALITY MAIN QUALITY FACTORSElectricity Service

24. ?? RELIABILITY, ADEQUACY, SECURITY, CONTINUITY, …?? • ADEQUACY = EXISTENCE OF ENOUGH INSTALLED AND EXPECTED AVAILABLE CAPACITY TO MEET DEMAND (LONG-MEDIUM TERM ISSUE) • GENERATION (INCLUDING IMPORT) • SECURITY = READINESS OF EXISTING CAPACITY TO RESPOND WHEN IT IS NEEDED IN OPERATION TO MEET THE ACTUAL LOAD (SHORT TERM) • GENERATION AND TRANSMISSION • CONTINUITY = THE CAPABILITY TO SUPPLY ELECTRICITY WITHOUT INTERRUPTIONS (SHORT TERM) • DISTRIBUTION (80-85% OF CUSTOMER MINUTES LOST)

25. User France, Great Britain, Ireland, Italy, the Netherlands and Portugal* Transformer Finland** and Norway Power Spain WEIGHTING METHODS USED FOR CONTINUITY INDICATORS * In Portugal MV continuity of supply is based on three indicators: SAIFI, SAIDI and TIEPI. SAIFI and SAIDI are indicators weighted by the number of customers, TIEPI is weighted by power **In Finland the indicator is based on transformer district and is not weighted in any way

26. UNPLANNED INTERRUPTIONS (1999–2001) MINUTES LOST PER CUSTOMER PER YEAR

27. UNPLANNED INTERRUPTIONSVOLTAGE ANALYSIS (2001)

28. CONTINUITY OF SUPPLY:REGULATION MAIN STEPS • MEASUREMENT RULES • CLASSIFICATION • ORIGIN • CAUSES OF INTERRUPTIONS (RESPONSIBILITIES): • ACTS OF GOD (“FORCE MAJEURE”) • USERS’ OR THIRD PARTIES’ RESPONSIBILITIES • GEOGRAPHIC CLASSIFICATION/NETWORK STRUCTURE • REPORTING • PERFORMANCE STANDARDS • AUDIT PROCEDURES • ECONOMIC INCENTIVES/PENALTIES

29. CONTINUITY OF SUPPLY REGULATION:MAIN REGULATORY CHOICES • IDENTIFYING QUALITY MEASURES THAT ARE OBJECTIVE AND OBSERVABLE • ADDRESS THE ASPECTS OF QUALITY THAT ARE MOST RELEVANT TO CONSUMERS • ADDRESSING THE ISSUE OF RESPONSIBILITY FOR INTERRUPTIONS • SETTING A BASELINE THAT IS CONSISTENT WITH QUALITY EXPECTATIONS AGREED IN THE PRICE CONTROL REVIEW • ADDRESSING THE ISSUE OF VOLATILITY IN PERFORMANCE • SETTING INCENTIVE RATES THAT ARE NOT ABOVE CONSUMERS’ WILLINGNESS TO PAY AND DO NOT OVER-EXPOSE UTILITIES FINANCIALLY • REWARDING AS WELL AS PENALIZING UTILITIES FOR PERFORMANCE

30. CONTINUITY OF SUPPLY REGULATION:U.S. EXPERIENCES(Survey sample: 42 States – Source: Ohio University)

31. COMPETITION AND QUALITY REGULATION • DISTRIBUTION  REGULATION • SUPPLY  COMPETITION ? • YES, BUT: • COMPETITION DOESN’T NECESSARILY GUARANTEE ADEQUATE QUALITY TO CUSTOMERS • ESTERNALITIES • PUBLIC SERVICE OBLIGATIONS • TRANSACTION COSTS - INFORMATION • LONG-TERM EFFECTS

32. SOME CONCLUSIONS • REGULATORS DESIGNING INCENTIVE SCHEMES FOR QUALITY FIND DIFFERENT SOLUTIONS TO COMMON IMPLEMENTATION PROBLEMS • A GOOD UNDERSTANDING OF UTILITIES’ COSTS AND CONSUMERS’ WILLINGNESS TO PAY IS FUNDAMENTAL; A GOOD ESTIMATE OF ONE OF THE TWO IS SUFFICIENT TO DESIGN AN EFFICIENT SCHEME • ALL SOLUTIONS ARE EQUALLY VIABLE, THE CHOICE DEPENDS ON THE OVERALL DESIGN OF THE INCENTIVE SCHEME • DIFFERENCES IN REGULATION SCHEMES ARE WELCOME; THEY MUST BE UNDERSTOOD AND JUSTIFIED