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February 03, 2012
Brattle Group Economists Prepare International Review of Electricity Distribution Reliability for Australian Energy Market Commission

Economists at The Brattle Group have prepared a report for the Australian Energy Market Commission (AEMC) that analyzes electricity distribution regulatory practices in North America, Europe, Australia, and New Zealand and develops recommendations as to “best practices.” “The reliability of electric utility distribution systems continues to be an area of focus for regulators throughout the world, particularly for those in jurisdictions where customers have recently experienced prolonged outages,” said William Zarakas, a Brattle principal and co-author of the study. “High levels of reliability, however, typically come with a cost, and are reflected in customer bills. This can cause some concern among regulators.” In Australia, regulators have tracked levels of electric distribution reliability and also observed increases in customer bills. Their concerns about striking the right trade-off between cost and reliability led them to ask The Brattle Group to study this issue and investigate how regulation may influence levels of reliability and costs. The study examines reliability and regulation in a panel of jurisdictions internationally, finding that while reliability standards and performance vary considerably between distributors, the degree of under- or over-performance varies less. In most jurisdictions, the match between performance and standards was quite close, suggesting that the standard setting process has resulted in standards reflective of the unique circumstances facing each distributor. Distributors were able to meet these standards with proper planning and attention and deployed resources accordingly. The study also finds that the inclusion of a financial incentive mechanism aimed at reliability (i.e., above and beyond tracking of performance against standards) is perhaps the single most significant differentiator among regulatory approaches to reliability. Comparisons of performance versus reliability targets indicated that, in many cases, the distributors with the strongest financial incentives (i.e., those facing the highest potential penalties/and or rewards) tend to comply more closely with reliability standards, at least in regard to the average duration of interruptions. Brattle’s analysis also determines that most of the distributors reviewed used internal data concerning costs and system characteristics when deciding on enhancements and maintenance levels for their distribution systems. “Value-based” planning, which refers to planning based on the value of reliability to customers or customers’ willingness to pay for heightened reliability, is more market oriented, and is beginning to be used in Australia as well as in a few European jurisdictions. Use of value based analysis may change some thinking concerning the trade-off between cost and reliability. The report, “Approaches to Setting Electric Distribution Reliability Standards and Outcomes,” also sets out specific recommendations for Australia. Co-authored by Brattle principals Serena Hesmondhalgh and William Zarakas, and senior associate Toby Brown, the report is available below.