Reputation Mechanisms And Network Reliability

Lynne Kiesling

Y’all are so on the ball, I can’t string out any kind of argument, can I? In the comments to yesterday’s post about reputation mechanisms and the “Scarlet Letter” in electric reliability, jdr points out that “customer choice, where it exists, generally applies to the supply side rather than to the operations side, where customers generally have little choice.”

Yes, precisely. In a world where customers receive only service quality information, and where that’s what they are likely to care most about, is it realistic to think that end-use customers are going to provide sufficient enforcement for this reputation mechanism to work well? Probably not. So in a system of transparent operations information provision for the development of a reputation mechanism, the question then becomes: who are the customers? Who are the people who have the best incentives to follow Chairman Wood’s inveighing them to check the NERC reports? Because without a clear set of customers who have a clear incentive to check on the performance and change their behavior accordingly, the reputation mechanism loses its effectiveness.

A policy change that would encourage at least some customers to care more about operations violations would be to enable customers to, as Mike says, have price/reliability options. If I’ve paid for a particular quality of service and your operations don’t enable you to deliver that quality, you’d better bet your bipee that I’d hightail it over to the NERC webpage and check out your performance. Even better, I’d do so before choosing which among several competing retail electricity service providers would get the honor of my business. That good incentive on my part provides a deterrent incentive to the electricity service provider.

One challenge to this vision will be the fragmented supply chain. The retail provider would not necessarily be the entity whose operational performance would be found in the NERC data. If that’s the case, then this could evolve into a system where the actual customer for the NERC data and for whom the reputation mechanism would be the most effective would be the retail provider, not the end customer.

Hmmmm …

2 thoughts on “Reputation Mechanisms And Network Reliability

  1. Clearly, retail consumers will not be the power users of NERC quarterly reports. The reports, and the subject matter that they cover, is just too specialized and technical in nature.

    But, as Lynne says, the retail provider would have both an incentive and (at least access to) the technical expertise to assess the quality of the local transmission company.

    Transmission systems, too, want to track the level of quality provided by their neighbors. Especially given the extent to which the current structure of the grid exposes one transmission owner to the faults of its neighbors, each system has an incentive to participate in the “neighborhood watch.”

    Retail customers don’t have to get involved directly. Customers just need to ding the retail energy provider when service quality suffers, and the retail service provider will have an incentive to try to overcome the problem.

    (In a like manner that I, as an airline customer, don’t need to worry about the reliability of the airline’s fuel supplies. The airline knows that if it doesn’t have the fuel on hand to allow a plane to take off on schedule, the retail customers will move their business elsewhere. That consumer threat provides an incentive to the airline to worry about the reliability of fuel suppliers (and all the other ingredients that go into a successful airline flight).

  2. The airline analogy seems misapplied, but we may be understanding the electric industry terms differently. Fuel comes bundled with airline service, and on airline service I have a choice among providers. Service quality reputation matters directly, as it will strongly affect my choice.

    In utility operations, transmission, and delivery, I have no analogous choice. I may have a choice of energy provider, but this provider’s performance is barely connected with “service quality” as I understand the term’s use in the industry [reliability of delivery, voltage regulation, harmonic noise, etc., at the point of delivery].
    The distributor is largely responsible for these qualities, the deterioration of which may have nothing to do with the quality of supply, or the reliability of any given energy supplier. I suspect that what you mean by quality of service is a concept of *system* supply reliability differentiated among consumers.

    The concept that people on the same distribution system should be able to buy different levels of service reliability has been around for some time. Often people think of it in terms of interruptibility of individual loads; I tend to think of it more in terms of price protection. A consumer who wants to pay for reliability could do so in the form of a flat price for service on demand. A consumer who doesn’t wish to pay for reliability could (should!) be exposed to real-time marginal price variations. Interruptibility of the consumer could be voluntary or automated on site, assuming the timely availability of price signals. But this is your demand response that you write of so often.

    Anyway, we got here starting with NERC violation information which I still contend has much more to do with system-level operations and little to do with the reliability of energy suppliers. Reputation will matter in choice of energy suppliers, certainly, but the reputations of suppliers are not likely to be built or destroyed by routine NERC reports. More likely reputation will be determined by the financial and business sections of newspapers.

    I fear I may have dragged this discussion far afield over semantics…

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