Holding power companies to account and compensating consumers

Lawrence Solomon
National Post
August 16, 2003

The food in your freezer has spoiled. The clocks in your home need to be reset. Your schedule has been thrown out the window.

Shouldn’t someone – apart from you – have to pay for the disruption that power shortages cause in your life? Wouldn’t power companies smarten up if they were actually held to account for the disruptions they foist on customers and if they didn’t operate in a 100%-monopoly system, in which their customers aren’t free to take their business elsewhere if they choose?

In the United Kingdom, power companies are held to account in just these ways. Customers are free to choose among many suppliers. They are compensated for their inconvenience. And a revolution in reliability has occurred.

When the United Kingdom privatized its power system in 1990, it injected accountability into what had been a decrepit state-owned monopoly system. The number of power cuts per 100 customers has declined precipitously, by a whopping 31%. The average duration of those power cuts has also fallen, by 64%. Customers have not only been spared from cost and inconvenience from disruptions that did not occur, they have received millions of pounds in compensation for the fewer disruptions that did.

Ontario’s government-owned monopoly system of today resembles the cumbersome U.K. utility that existed prior to privatization. The Ontario monopoly mostly produces unreliable electricity from outdated and failing coal and nuclear plants. And it has starved the power grid network of needed investments in order to prop up its money-losing nuclear plants, making the delivery of power unreliable as well.

When the weather behaves, and its luck holds out, power gets to customers. In the past few years, the system has become so unstable due to lack of investment in both generating stations and in the grid, that Ontario’s power authorities have resorted to pleading with customers to cut back or face brownouts and blackouts. This week, the lack of investment caught up with Ontario and cost Ontarians big-time.

Once, the U.K., too, suffered from lack of investment. Then, after privatization, when the one big cumbersome monopoly was broken up into about 20 nimble companies, competition soon transformed the industry. The polluting coal and nuclear plants were rapidly replaced by a new generation of high-efficiency natural gas-fired systems. And more than £30-billion was invested in the transmission systems to make sure the clean power could get to customers. Despite the mammoth private-sector investments, costs plummeted, benefitting residential and industrial customers alike. It was the most rapid transformation of a power system in the history of the world and it occurred almost invisibly, without any California-style power fiascos. Because it was also the first major privatization, it occurred without benefit of any precedents to guide the way.

In reforming its power system, the U.K. recognized that the electricity system is a hybrid: The generating plants are naturally competitive and can operate on a free-market basis with relatively little regulation; the transmission lines, in contrast, are naturally monopolistic and require a good deal of regulation to keep them honest. Intelligent regulation – much of it oriented to improving customer service – became a hallmark of the U.K. reforms.

Under the U.K. system, electricity suppliers must guarantee their customers standards in 11 different areas – everything from responding to customer telephone calls on a timely basis to keeping appointments to restoring power after disruptions. In their first year under the regulator’s gun, power companies made 13,000 payments to consumers in compensation for poor service. That number dropped to a mere 2,251 within five years. The customers don’t get rich from the compensation – some infractions fetch only a few pounds and a seriously affected customer can usually claim only £50 from a major interruption (18 hours without power). But the compensation is enough to keep companies on their toes and striving to develop ever-more reliable systems.

The U.K. regulatory system continually tightens its expectations of companies. It sets targets for different companies to meet and, as companies get better, the regulator sets the standards tighter. But the system also adjusts with feedback from customers as to their preferences. In the past, a standard for interruption of service has been one minute without power, a hardship that most residential customers found trivial. Even a three-minute interruption to a residential customer, the regulator discovered, costs the typical domestic customer only four pence. A three-hour interruption, in contrast, costs the typical customer £4 – with interruptions of this scale, meal arrangements may need to be changed. Customers also reported they were particularly perturbed by repeated interruptions, even if each is relatively short, leading the U.K. regulators to develop compensation schemes of £50 for customers who experience more than three interruptions of three minutes or more in a year.

Is a three-minute interruption an appropriate standard? Should companies be allowed to keep customers dangling on the telephone line for more than 15 seconds? These are the controversies that now beset the United Kingdom’s privatized power system.

Were we only so lucky.

Lawrence Solomon is executive director of Urban Renaissance Institute, a division of Energy Probe Research Foundation.; LawrenceSolomon@nextcity.com

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