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Incentive Regulation and Customer Service Quality

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Incentive Regulation and Customer Service QualityOverview of PresentationIncentive Regulation in U.S. Network IndustriesReasons for Different Adoption PatternsIncentive Regulation & Service QualityExperience in U.S. TelecommunicationsIncentive Regulation & Service QualityExperience in the UKService Quality RegulationTwo ApproachesMonitoring and Complaint ApproachQ Factor Approach In PrincipleQ Factor Award MechanismService Quality Challenges in ElectricityUnderinvestment in TransmissionService Quality Challenges in ElectricityUnderinvestment in TransmissionIncentive Regulation & Service QualityIn SummaryIncentive Regulation and Customer Service QualityRoss C. HemphillVice PresidentChristensen AssociatesPresented at the Harvard Electricity Policy Group MeetingDecember 11, 2003December 20032CHRISTENSEN ASSOCIATESOverview of Presentation Comparison of incentive regulation in U.S. telecom and electricity industries Service quality and incentive regulation— U.S. telecom industry— U.K. experience Service quality mechanism options— Monitoring and Complaint— Q Factor Implications for electricity industryDecember 20033CHRISTENSEN ASSOCIATESIncentive Regulation in U.S. Network Industries Various forms of incentive regulation have been present for almost 30 years— Rate freeze— Earnings sharing— Price caps Comparison of telecom and electricity— Widespread adoption in telecom industry— Electricity started later and has not evolved as muchDecember 20034CHRISTENSEN ASSOCIATESStates With Incentive Regulation TelephoneDecember 20035CHRISTENSEN ASSOCIATESStates With Incentive Regulation ElectricityDecember 20036CHRISTENSEN ASSOCIATESReasons for Different Adoption Patterns Our paper identifies four reasons for difference between telecom and electricity— Sponsorship by federal regulators— Institutional factors related to legacy of previous regulatory regimes— Quality/reliability concerns— Technological change and competitive pressuresDecember 20037CHRISTENSEN ASSOCIATESIncentive Regulation & Service QualityExperience in U.S. Telecommunications Empirical studies do not find a relationship between incentive regulation and service quality No significant impact of any regulatory policy on telephone service qualityDavid Sappington, “The Effects of Incentive Regulationon Retail Telephone Service Quality in the United States,”Review of Network Economics, Vol. 2, Issue 4 – December 2003.December 20038CHRISTENSEN ASSOCIATESIncentive Regulation & Service QualityExperience in the UK“an important argument for the privatizationof BT had been the expectation that it wouldimprove quality of service.”“Companies vied with each other not to beat the bottom of the quality of service leaguetables; and thus in turn facilitated the regulatoryspecification of higher Standards of Performanceover time.”Stephen Littlechild, “Reflections on Incentive Regulation,” Review of Network Economics, Vol. 2, Issue 4 – December 2003December 20039CHRISTENSEN ASSOCIATESService Quality RegulationTwo Approaches Monitoring & Complaint Approach— Set standards and deal with performance and individual problems through penalties— Used frequently in telecom industry Q Factor Approach— Symmetrical incentive based approach using rewards as well as penaltiesDecember 200310CHRISTENSEN ASSOCIATESMonitoring and Complaint Approach Monitoring system gathers information about service quality parameters Penalties imposed when firm fails to meet standards Quality problems generally dealt with on a case-by-case basis May have different policies for persistent problemsDecember 200311CHRISTENSEN ASSOCIATESQ Factor Approach In Principle Includes rewards and penalties depending on measured quality relative to standards or benchmarks Basic Components— Indicators of company’s quality of service— Associated service quality benchmarks— Means of assessing quality of service— Method for translating quality assessment into rate or revenue changesDecember 200312CHRISTENSEN ASSOCIATESQ Factor Award Mechanism Award mechanisms determine the adjustments in rates or payments that are warranted by the achieved level of service quality In principle, awards and penalties should reflect customers’ values and costs of each service attribute Important design issues include symmetry of awards and penalties and the allocation of benefits between the company and its customersDecember 200313CHRISTENSEN ASSOCIATESService Quality Challenges in ElectricityUnderinvestment in Transmission Underinvestment in transmission is a major concern in the electricity industry Insufficient transmission means lower service quality and higher costs in the electricity industry— Higher levels of congestion— Higher power losses— Lower reliability— Imperfect competition in the generation market— Higher than optimal costsDecember 200314CHRISTENSEN ASSOCIATESService Quality Challenges in ElectricityUnderinvestment in Transmission This problem developed under cost of service regulation, or remnants thereof It can be argued that this problem developed because of cost of service regulation  Therefore, much effort is needed to develop an incentive-based regulatory program that will lead to efficient business decisions in the electricity industryDecember 200315CHRISTENSEN ASSOCIATESIncentive Regulation & Service QualityIn Summary Incentive regulation has been slow to develop in the electricity industry partly due to concerns over service quality But, empirical studies fail to find a relationship between service quality and incentive regulation in other industries And, other countries like the UK have successfully implemented incentive programs So, we should look to develop better incentive structures to address the growing challenges we face in the electricity


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