Performance based regulation

We students are helping set up a little conference down in Falmouth in a months' time and as part of that we are coming up with content to help promote the conference. I've taken this opportunity (or kick up the backside) to write about something mentioned a few weeks ago but that hadn't yet looked into: Performance based regulation. A guest lecturer from the USA said it how effective it has been on occasions (for example, utilities go down street by street with new fridges and swap them then and there if people bring out their old one). We had discussions about the ramifications of this, namely placing no emphasis on individuals to do anything about their energy use (but currently do they understand the problem/have the money/ability to change, is climate change such a problem that taking control from people is necessary/allowable?) So anyway, here's what I wrote:


The UK has set itself some rather challenging targets with respect to climate change and energy use. But while it is set to meet its Kyoto target, it is failing at others, from renewable electricity generation to eliminating fuel poverty. Current policies seem to either not be working fast enough or just not working, so is a change of focus required? From the Low Carbon Buildings Programme to the Act on CO2 advertisements, emphasis is placed on the individual to change and reduce their energy use. Getting information to people and persuading them to take action is notoriously difficult, so is there another way?

Take for example the electricity market. Currently in the UK, electricity is sold per unit (a kWh). Perversely the first batch of units cost more than subsequent units as the utilities also look to make a return on those who consume relatively little. This has several problems:

• There is no disincentive for the consumer not to use more energy when costs don’t progressively increase.
• There is no incentive for utilities to sell less or energy efficiency to the consumer, as they make more money the more units they sell.
• Cost cutting in a competitive market can mean reductions in operating and maintenance budgets, with resulting impacts on network safety and performance. The difference between 1 blackout a year and none is disproportionately large and as consumers suffer the effects of blackouts while utilities pay the cost of maintenance, it is sometimes not in their best interests to be 100% reliable.
• The most profitable course of action is not related to what is the most socially beneficial or acceptable one. For example, users of pay as you go meters tend to be those on low incomes and use smaller amounts of energy, but they pay more per unit than standard users.

So are there alternatives?

In parts of the US, they moved to performance based regulation after privatisation of the gas and electricity sector. This regulation revolves around regulators setting a base rate for each utility to charge consumers, with performance based targets giving those companies the chance to make their profits (or losses) and governments the partial ability to aid social goals. Targets might include employee safety, system reliability, customer satisfaction, lower pollution etc. The benefits of this system include:

• Cheaper and more stable electricity prices to the consumer. The base rate shouldn’t include the utilities profit margin, as profits would come from the bonuses awarded by governments for meeting or exceeding performance targets, so electricity would be cheaper. Potentially the overall cost through bills and taxes might be similar if targets are met, but if so, society should still have benefited due to the nature of the targets.
• By not restricting the methods companies choose to reach the targets, innovation is less restrained which potentially results in cheaper methods of supply.
• Switching the focus of energy efficiency measures away from individuals to utilities could take advantage of utilities larger capital reserves and greater buying power to speed up deployment of these measures
• The issue where a landlord pays for energy efficiency measures but the tenant gets the cost savings is avoided if the utilities take charge.

Performance based regulation does have its own downsides as well.

• The effectiveness is very dependent on the quality of the targets, too lax and companies can make excess profits (as has happened on occasion in California) or not well thought out enough, resulting in targets being met in undesirable ways or being contradictory.
• The cost of regulation is higher due to the effort in creating base rates and targets and overseeing the authenticity of utilities actions.
• The need for individual action or even awareness of climate change and energy use is greatly reduced. In the long term does the lack of connection mean you don’t take care of the solar panels on your roof or stop conservation measures after a few months or would it inspire you to go further?
• Does it place too much importance on the role of utilities in society, if they supply our energy and also decide for themselves how best to meet certain social goals?
• Does it permit a culture where governments see fit to take a more authoritarian role? (like ID cards etc)

This alternative viewpoint does promote interesting thoughts, but considering we have already gone down a different regulatory path post-privatisation, realistically is it possible to change? And although in theory it might be a better option, in practise how effective would it be? Parallels can be drawn to the EU Emissions Trading Scheme which is in theory the most cost efficient manner to reduce emissions in industry, but the structure of the scheme and other external factors have meant the actual reductions are questionable. Therefore would it be better to take certain parts of performance based regulation, for example more schemes in the idea of the existing Carbon Emission Reduction Target and combine it with changing the existing system to charge units more progressively?

*After showing this to Catherine and Bridget they say that the current system in the UK does have a lot in common with PBR, with CERT and EEC before it, and various transmission and distribution performances among others, but that they are limited in scope. So you learn something new everyday.

Cynicism

Following on from one of my earlier blogs, our class had a little discussion on two documents the Government has published recently. (New Industry, New Jobs and Investing in a low carbon Britain)

I said before that I was surprised the potential shift in fundamental Government philosophy wasn't given more coverage (at least that I was aware of) and I guess it seems you need a bit more experience in reading publications in this age of spin. The declaration of "new activism" is arguably little more than a new name for what goes on already and a publicly acceptable phrase for the supportive measures of traditional electricity generation. Governments have deliberately intervened before (via regulations, obligations, R&D funding, subsidies etc.) and will always do so, the latest case being support of coal (next blog I feel).

I can't say I like the idea of being a cynic by default, but I guess it's sort of a natural reaction to the apparent culture of political language nowadays that is high on promotion and low on substance. I mean we are all biased to some degree about everything, so it's entirely understandable the possibility (especially in a like-minded group like say, a masters class) that you might focus disproportionately upon the 'negative' actions of a certain group, while unaware of the constraints and demands they have faced or ignoring the good things they've done. It doesn't necessarily mean you're wrong of course, but there's this nagging doubt in your mind that you could be, because you can't prove things right, only wrong. That openness and flexibility is important when neutrality is required, like in Government, but has the downside of possibly appearing to lack conviction or taking relatively longer to form decisions.

Anyway, I'm rambling, it's getting late and I have two presentations and a research proposal for the end of next week, might seem a long time away but I know it isn't really.