1. NARUC Energy Regulatory Partnership Program The Georgian National Energy Regulatory Commission and The Vermont Public Service Board by Ann Bishop Vermont Public Service Board July 2, 2008 Regulating Service Quality in Vermont

2. 2 Overview v Who should monitor service quality and why v Board’s authority for regulating service quality v Reasons for setting standards v Methods for regulating service quality v Measuring service quality v Vermont service quality plans v Enforcement

3. 3 Who Should Monitor Service Quality and Why v Utilities –Meet statutory requirements –Provide reasonable customer service and build customer loyalty –Measure company performance, possibly tied to employee and management incentive plans v Regulators –Enforce statutory requirements –Protect consumers v But, pressure on utilities to cut costs can result in inadequate service quality –Competition has not been an adequate substitute for regulatory monitoring –Move to competitive markets increases the importance of regulatory monitoring

4. 4 Board’s Authority for Regulating Service Quality v Companies must “furnish reasonably adequate service, accommodation and facilities to the public” (30 V.S.A. §219) v Board has jurisdiction over “the quality of any product furnished or sold” by regulated companies and must ensure utility operation is “reasonable and expedient” and “promote[s] the safety, convenience and accommodation of the public” (30 V.S.A. §209)

5. 5 Reasons for Setting Standards v Measurable standards give meaning to “reasonably adequate service” and thereby facilitate enforcement v Standards can: –Focus management attention on critical indicators –Prevent service deterioration in an environment with pressure to cut costs –Allow for comparison across companies when standards are the same or similar –Provide public accountability if results are published

6. 6 Methods for Regulating Service Quality v Statute – unusual, too specific v Rules v Generic standards by industry v Company-specific service quality and reliability plans v Litigation of specific service quality problems or inclusion of service quality issues in rate cases

7. 7 Standards Set by Rule v Advantages –Uniform across target industry or multiple industries –Easily communicated v Disadvantages –Relatively hard to provide variations by company –Relatively difficult to adapt to changing conditions –Many parties involved in adoption process so results may be less fine-tuned, weaker than other approaches v Rulemaking most effective for codifying well- established standards on distinct topics –Example: electric reliability reporting v Board Rule 4.900 requires reliability reporting by electric utilities

8. 8 Standards Set by Generic Docket v Generic docket in which all industry participants can be parties v Advantages –Uniform within target industry –Relatively easy to communicate (one docket applies to all) v Disadvantages –Relatively hard to provide variations by company –Relatively difficult to adapt to changing conditions –Many parties may make lowest common denominator the result v Vermont has generic service quality standards and reporting for all wireline telephone companies

9. 9 Standards Set Through Individual Company Plans v Plans negotiated or litigated on a company- specific basis v Advantages –Permits tailoring of standards to each company based on areas where improvement may be needed –Permits tailoring of measurement protocols to each company’s systems, reducing the need for costly system changes –Plans are more detailed (including data sources and measurement protocols), thereby increasing confidence in data quality

10. 10 Standards Set Through Individual Company Plans v Disadvantages –Lack of uniformity unless efforts are made to develop consistency –Plans may need frequent amendment when companies make changes to internal systems v All Vermont energy companies and the largest telecommunications company operate under individually negotiated service quality and reliability plans

11. 11 Standards Set Through Rate Cases or Other Litigation v Litigation of service quality problems either in the context of rate cases or as stand-alone cases –May be litigated or negotiated v Advantages –Highly targeted to specific, documented instances of poor service –Expedient (and efficient) means of solving specific problems v Disadvantages –Most effective for narrow and specific issues rather than broad, systemic approach to general service quality –Generally a less collaborative approach than other models; companies may feel forced to come to the table by connection to rate issues

12. 12 Standards Set Through Rate Cases or Other Litigation v Recent example: –Customer raised reliability concerns at a public hearing in a rate case for a large electric utility –Board asked utility to provide information about the reliability of the customer’s service during the technical hearings –Evidence showed that customer’s service was not reasonably adequate –Board required utility to identify and implement measures to improve the customer’s service

13. 13 Measuring Service Quality -- Principles v Select what is most important to consumers v Keep it simple (limit number of measures) v Prevent improvement gained at the expense of something that isn’t measured v If possible, work within existing utility systems to minimize implementation costs v Use industry-accepted benchmarks where available and meaningful

14. 14 Measuring Service Quality -- Components v Performance area –What to measure v Performance threshold –Where to set the baseline v Sources of data –What utility systems or procedures will provide the data to measure performance

15. 15 Measuring Service Quality – Data Collection v Different utilities collect different types of data, depending upon their systems –In Vermont, many smaller electric utilities do not have automated phone answering systems, and therefore are unable to collect data on how many calls are answered within a specified number of seconds v Even when utility systems are capable of collecting the data, they might not have done so in the past –Initial electric service quality plans required utilities to collect data related to a few performance standards for a year before baselines were developed for those standards

16. 16 Measuring Service Quality – Data Collection v When utility systems change, performance standards or baselines might also need to change –A large utility acquired a new system for measuring outages that captured more information; the baselines for reliability performance standards were adjusted upwards to reflect the improved measuring capabilities

17. 17 Measuring Service Quality -- Baselines v Consider accepted national norms from industry groups v Consider individual utility’s historical performance –Where appropriate, standards can target service improvement over time –Where utility is performing adequately, standards should be set to prevent deterioration v Consider reasonable customer expectations v Remember: –“Reasonably adequate” service is not the same as excellent service –Cost of improving poor performance may be high and may be reflected in rates

18. 18 VT Service Quality Plans – What is Measured (Electric) v Customer service –Customer service answer time, abandon rate, busy signals, outage call answering, blocked calls –Billing accuracy, timeliness of billing and payment posting –Meter reading (actual or estimated bills) –Field work (line extensions and other) completed as promised, length of delay when jobs are late –Customer satisfaction – transactional and overall as measured by surveys and complaints to regulators

19. 19 VT Service Quality Plans – What is Measured (Electric) v Reliability –SAIFI: System Average Interruption Frequency Index –CAIDI: Customer Average Interruption Duration Index v Worker safety –Lost time incident rate (incidents causing injury) –Lost time severity rate (number of employee days lost)

20. 20 VT Service Quality Plans – Sample Performance Standards (Electric) v >75% of calls reach a company representative within 20 seconds v >99.9% of bills rendered within 7 days of scheduled billing date v >90% of meters read monthly v >95% of customer-requested work completed by promised date v >80% of customers satisfied or completely satisfied with utility (based on telephone survey of valid random sample) v Lost time incident rate of <3.5 v SAIFI of <2.5, CAIDI of <3.5

21. 21 VT Service Quality Plans – Financial Consequences v Service guarantees (electric and gas only) –Utilities must give credit for service not delivered as promised or on time u $10 payment for inaccurate bill u Waiver of installation charges for missed appointment –Consumer who suffered poor service is compensated directly –Not all aspects of service quality are amenable to guarantees (for example, call answering performance)

22. 22 VT Service Quality Plans – Financial Consequences v Service quality compensation –Utilities must pay customers if miss certain performance standards –Amount of payment increases based on how much the utility missed the baseline –For investor-owned electric utility, maximum annual payment is 0.75% of revenues (shareholders pay) –For municipal or cooperative utility, maximum annual payment is considerably less –For telecommunications utility, maximum annual payment is $10.5 million (approximately 8% of revenues) u The maximum annual payment was deliberately set high to counteract the cost-cutting pressures due to competition

23. 23 VT Service Quality Plans – Financial Consequences v Utilities may request a waiver of penalties, must demonstrate: –Circumstances causing the failure were outside the utility’s control –Utility’s level of preparedness and response was reasonable in light of the cause of the failure

24. 24 VT Service Quality Plans – Financial Consequences v Board has granted and denied waiver requests –Granted waiver of service guarantees when error in electric utility’s billing software resulted in very small overcharge (approx. $0.38) in 10,500 customer bills –Denied waiver of service quality compensation due by telecommunications utility as result of multiple missed performance standards (at same time, did grant waiver of one missed standard) u Did allow utility to use $6 million of $8 million penalty to invest in network improvements; remaining $2 million was credited to customers on their bills

25. 25 Enforcement – Vermont Service Quality Plans v Utilities report performance quarterly (reliability and worker safety measures are reported annually) v Regulators can audit a utility’s reporting anytime v Compliance is measured by 12-month rolling average to account for seasonal variation in performance v Action plans required for severely deficient quarterly results v Utilities report performance annually to their customers

26. 26 Enforcement – Other Mechanisms v Reduction in allowed return on equity v Fines –Vermont law permits fine up to $100,000 or 0.1% of gross Vermont revenue per violation v Imposition of performance conditions v Probation v Revocation of Certificate of Public Good