In MPSC case no. U-21400, the Commission sought comments on the subject of financial incentives and disincentives for utilities based on their attainment of statutory service quality standards. MPSC staff proposed that utilities should be eligible to recieve incentive bonuses for improving their performance, even if they remain below standards according to some or all measures. Several MI-MAUI members provided comments about this proposal, which MI-MAUI filed along with the following cover letter responding directly to Commission questions.

MI-MAUI joins comments submitted by CUB of Michigan in response to these questions and offers the following, supplementary comments from the unique perspective of local governments.

1. Should incentives be available, even if a utility’s performance on one or more metrics falls below the minimum standards for service quality found in the Commission’s rules? Or is it worth incentivizing faster progress given the reliability challenges affecting customers?

Most of the public officials representing MI-MAUI member communities opposed performance incentives for a utility that does not meet all service quality standards, in comments MI-MAUI submitted to this docket on February 2, 2024.

Mayor Stephen Kepley of the City of Kentwood opposed all performance incentives on principle: “As with monopolized utility companies, the City of Kentwood is in the same boat. We have a captive customer base. It would be imprudent to add performance-based financial incentives to our staff for them to provide excellent service. Excellent service is the goal and requirement for each employee to work here!”

Mayor Kepley’s comments underscore that the Commission should take care to distinguish between a monopoly public utility and an unregulated private company when thinking about economic incentives. From the perspective of local governments, the Commission should be mindful of the reasons that electric utilities were granted local franchises in the first place. Most relevant here, monopoly franchises were expected to lead to greater reliability for the community, by easing planning and coordination and providing consistent service quality and standards. In other words, electric utilities have already been compensated, through the grant of local monopoly franchises, in return for a promise to provide baseline reliability. The appropriate way to address a utility’s failure to properly do a job for which it is fully compensated is to hold it accountable, not to offer it more money.

• If the level of performance needed to earn an incentive is increased to align with the Commission’s service quality standards, should there be changes to the penalties as well (e.g., changing the threshold to incur a penalty and/or phasing in penalty amounts)?

Local governments that submitted comments were not unanimous about the level of performance that should be needed to earn an incentive. Most opposed incentives if any SQRs were not satisfied, and one opposed incentives in all circumstances.

The meaning of “phasing in penalty amounts” is ambiguous. There is no apparent rationale for phasing in penalties over time. MI-MAUI would agree that phasing in penalty amounts to reflect the degree of excursion from the standards would be warranted. In other words, penalties should escalate faster than the degree of nonattainment because that is how customers experience costs and damages from an outage. For most residential customers that MI-MAUI members represent, the tenth hour of an outage is much more disruptive and costly than the first hour, and the forty-eighth hour is even more damaging. Customer losses grow exponentially over time, not linearly.

This observation leads us also to observe that the discussion in the record about symmetry between incentives and penalties is poorly grounded. Here, again, MI-MAUI members adopt the perspective of the community members they represent. Symmetry implies that costs and benefits created for customers and communities by changes in reliability have a linear relationship with changes in any given performance metric. There is no evidence in the record to support this implicit assumption. Indeed, we observe diminishing returns to reliability improvements. That is, improving SAIDI from four hours per year to three hours per year would both cost more and yield less customer and social benefit than improving from eight hours to seven hours: the cost-benefit ratio of that same one-hour improvement is not constant. Thus, the penalty for missing a performance standard by 25% should be greater than the incentive for exceeding that standard by 25%, not equal but opposite. If incentives and disincentives are to have an economic purpose, then penalties and incentives should be proportional to the real-world costs and benefits created, not to some abstract notion of mathematical elegance.

• There was a fair amount of discussion in the comments on the metrics proposed in the revised straw proposal. What is the appropriate number of metrics to encourage a comprehensive approach to improving distribution reliability without overly diluting the most important metrics? Which metrics should be used (with particular focus on CEMI and MED-only SAIDI)? How should these metrics be weighted?

MI-MAUI aligns with CUB’s comments in response to this question and offers the following observations from the perspective of local public officials, using customer and community experience as our guide.

The customer experience of an outage does not depend on whether the proximate cause was a natural event, not directly controlled by the utility, or an equipment failure over which the utility presumably has more control. When the power is out, the power is out. Powered medical devices do not function any differently, and food in the refrigerator does not go bad any slower, depending on what caused the outage. Again: if incentives and disincentives are meant to reflect the economic impacts of outages, then the ways performance is measured and compensated should reflect those impacts, not their causes.

From this perspective, SAIDI without MEDs is simply irrelevant. Furthermore, and again from the customer perspective, the proposition that a utility should not be held responsible for consequences of MEDs that it can anticipate, design, maintain, and prepare for – even if it cannot accurately predict when those events will happen – is nonsense. Communities hold their local governments responsible for anticipating, preparing for, and responding to all kinds of natural, social, public health, and economic events that they do not cause or otherwise control; the idea that a regulated utility operating under a publicly granted monopoly franchise should not be subject to a similar accountability logic is perplexing. Thus, the only meaningful SAIDI metric from the customer and community perspective is all-weather SAIDI.

We agree with CUB that a metric for worst-performing circuits would be problematic in its current form and agree with the approaches CUB suggested in its U-20147 filing. We interpret this proposed metric as recognition that performance measures should assess equity as well as averages like SAIDI, and we would agree in principle, but we also agree that CUB’s suggested approach would advance equity while also maintaining a usefully parsimonious set of dis/incentive metrics.

In sum, MI-MAUI agrees with CUB that the most important metrics are all-weather SAIDI and 48-hour storm response and stipulates to CUB’s suggested weightings.

• How should any penalties assessed under this framework be used? Should they be refunded to all customers? Used to fund a pool focused on low-income or particularly hard-hit customers? Be plugged back into additional system investments above those included in rates? Or some other way?

We support CUB’s response to this question and offer the following additional observations.

First, if financial incentives and disincentives are meant to reflect actual economic costs and benefits of reliability performance, then the proceeds of those financial mechanisms should flow directly to (and from) whoever reaps the benefits and incurs the costs of outages, rather than reinvesting penalties in system reliability projects.

Second, while we agree that penalties should compensate for burdens and costs caused by outages, we caution that customers are not the only stakeholders who bear those costs and burdens. Local governments are customers, too, but the costs they bear from outages are not determined primarily by how long power is out at City Hall or other municipal facilities. Local governments incur very substantial program costs when outages occur because the community’s demand for social and emergency services intensifies. These costs include:

• Installation, maintenance, and operation of backup power at critical facilities;
• Responding to and guarding downed wires;
• Siting, stocking, operating, and staffing shelters;
• Responding to emergencies triggered by power outages;
• Paying overtime to emergency and social service staff.

This is not the same as arguing that the utility should compensate commercial customers for all losses experienced during an outage, such as the cost of lost sales or lost production time. We do not necessarily refute that position; it is simply not our point here. Rather, the costs local governments bear in an outage are the costs of doing the utility’s job for it: assuring the community has access to heating or cooling, light, food, and other necessities. To hearken back to my earlier point about franchise agreements, from the perspective of a local government a power outage represents the utility’s failure to live up to the premises of its franchise agreement, and the local government should not be expected to shoulder the costs of that failure.

It would be one thing if power outages were evenly distributed among communities, such that public response costs could fairly be socialized through municipal taxes. But that is not the case. Owing to the condition of their electric distribution system, demographics, geography, and other factors, some communities experience worse reliability than others and suffer greater harm from those outages. I suspect, further, that communities that experience the highest public outage response costs correlate to the local governments least able to absorb those costs. The only equitable way to socialize local government outage response costs is by recovering them through penalties and paying them out to reimburse governments for those costs.

While straightforward in principle, we acknowledge that implementation of this idea would be complicated. We recommend that the Commission authorize a working group to develop this idea further.