In Chicago voters have a well-established custom of voting out of office the mayors they see as ineffective at cleaning up after the city’s serious snowstorms. Maryland regulators should hope that Pepco residents do not get as outraged over Pepco’s frequent and lengthy power outages.
Pepco’s website, in explaining how to submit claims, notes explicitly that it is not responsible for acts of God, such as weather-related outages. Of course Pepco fails to note that proper planning for regularly recurring storms and execution of emergency response measures is a matter of sound management and not divine intervention.
Pepco, as a publicly traded company interested in making money, shouldn’t be blamed for its failings. These failings cause many of my neighbors to act like textbook consumers—they reduce their reliance of Pepco by buying solar power or backup home generators, which hum like oversize cicadas on these tepid summer nights. But the effectiveness of these responses in changing Pepco’s behavior is limited because it is a monopoly supplier of electricity in large swaths of Maryland. As a monopolist it is closely overseen by a Maryland regulatory commission, whose function is to approve electricity rates that adequately compensate Pepco while avoiding the efficiencies that monopoly typically brings. The existence of this commission—and, specifically, its inaction regarding Pepco’s failings—is the heart of the issue.
Pepco’s frustrated customers ask what Pepco could do to prevent outages, except more trimming and removal of Montgomery County’s beloved trees, or burial of power lines at costs many believe are unacceptably high. This question is misplaced, because it focuses on managerial decisions that are better left to Pepco. A better question would focus on how Pepco’s regulators could change Pepco’s incentives to get it to minimize the expected cost to ratepayers of power outages.
One approach would be to adopt quantitative performance standards and mandate rebates to customers according to how badly Pepco misses the performance standards. Such rebates would serve multiple purposes. They would provide incentives to meet the standards. If the standards are missed, the rebates would compensate the individual customers who suffered the outage, serving as insurance. They thus spread the costs of outages from people without power to ratepayers more generally.
To pursue such performance standards, regulators should first categorize storm events according to their level of severity. Appropriate scales exist for hurricanes and tornadoes and the US weather service has data on wind conditions by hour for specific locales. Second, regulators should identify the best practice within the industry of outage rates, for storms of given severity for comparable utilities. Some areas like Montgomery County may be relatively vulnerable because it is densely populated and endowed with mature trees. Third, regulators should identify the best practice within the industry of responses to outages. Greg Easterbrook recently noted in The Atlantic that Pepco’s response was significantly slower than comparable responses in neighboring Virginia and Baltimore. And finally, homes that do not have power restored by the standard would receive a rebate according to historical usage.
Suppose, for example, that the standard specified that ten customers could be without power on day four and twenty were actually without power, then all twenty would get a rebate of half of that day’s estimated power costs; if two hundred were without power than the rebate would be 95 percent (.95=200/(200+10)). For customers who were without power for more than two days beyond the standard the rebate could be adjusted upwards since longer delays are more disruptive and costly.
To date the Maryland regulatory commission has not begun discussions of quantitative performance standards or rebates. For the sake of the ratepayers it is supposed to look after, it should. Given the frustrations among those ratepayers, it should probably explore such reforms for its own sake as well.
