Benchmarking as a Tool for
Regulatory Commissions

By Mary Clark Webster

About the Author...

Mary Clark Webster is a former Commissioner for the Massachusetts Department of Public Utilities, a multi-sectoral regulatory agency, responsible for electricity, natural gas, telecommunications, transportation and water industries. She has consulted to 23 regulatory agencies in Cyprus, Egypt, India, Iraq, Jordan, Kenya, Mongolia, Nepal, Pakistan, Romania, Russia, Turkey, Uganda, Ukraine, Vietnam, and the United States. She has a Masters degree in Political Science from Boston University and a Masters degree in Education from Tufts University.

Abstract

This article describes the real value to regulatory commissions of using benchmarking as a tool to enhance the financial and technical performance of regulated companies. Benchmarks, if correctly determined, can enable regulators to establish credible targets for performance indicators necessary for estimating tariff rates that best create incentives for continual improvement in operational efficiency. In this article, I will review the key considerations of designing a benchmarking system, and examine, as a case example, how benchmarking of utility performance has been implemented in Egypt by the Egyptian Electric Utility and Consumer Protection Regulatory Agency.

I. Introduction

Benchmarking is a system of comparative performance grading. It is an information-based approach for creating performance incentives. It is used in the utility industry to analyze performance and provide information about where performance can be improved. It can empower regulators with information to promote policy objectives. When properly designed, a benchmarking program can create incentives for continual improvement. Benchmarking can act as a proxy for the competitive forces of efficient markets.

Because a good benchmarking program will generate the necessary information on costs required for setting the target tariff rate, political posturing and hurdles arising from incomplete and asymmetric information can be minimized.

II. Key Points to Benchmarking Integration

A. Information Asymmetry

Asymmetric information is a major problem for regulatory commissions. Utilities will always have access to more information than the regulators. A key step for regulators is to determine what information they need to make sound decisions. Two guidelines may be helpful: 1) is the information readily available; 2) if the information is not readily available, is it information that the utility and the regulator need to know. When the answer to either question is positive, then the regulator should request (demand) the information.

Performance benchmarking has become standard practice in many regulatory commissions. Electricity, telecommunications, gas, water and transport companies use benchmarking to study their own performance over time and in comparison with others in their industry.

B. Practical Steps

There are four basic parts to the development of a good benchmarking system:

• Collection of good data;
• Use of correct indicators;
• Results that are easily understood; and
• Results that are well publicized amongst all key stakeholders.

The first basic standard is that the data be useful and timely information; this means that the data must be reliable, verifiable and capable of being regularly collected. Where there are concerns about the accuracy of data, the benchmarking system can build in data checks, by asking for the same information in different ways. The second basic standard is to arrive at correct indicators. There are now many excellent international studies of utility performance. These can form the basis for determining which indicators a regulator should employ when beginning a benchmarking system. The third basic standard is to have indicators that are easily understood. An indicator ought to be well defined, and the purpose of using it ought to be readily apparent. The fourth basic standard is that the results of benchmarking studies be well publicized. As the goal of benchmarking is to improve overall infrastructure industry performance, then publication of the results of a benchmarking study is very important. For example, the regulator's website is an ideal location for publishing results.

C. Tie to Ratemaking Policies

Benchmarking has significant value as a ratemaking tool. This is true for two reasons. First, a number of benchmarked data can be used to show/compare the financial performance of utility(s). For example, where the ability of the Regulator to set tariffs is not clear in its mandate or charter, the ability to use benchmarked information provides a baseline of comparison that can only improve decision making processes.

The second use of benchmarks is for "yardstick regulation". Under this mechanism, the target benchmarks or "yardsticks" can be set as the performance levels upon which tariffs will be based. If the yardstick is set for an efficient practice, then the company who can meet or exceed the efficient practice is managing their company optimally and will earn revenues accordingly. Conversely a company that is not managing their operations efficiently will not be able to meet the yardstick performance and will not earn revenues to cover their excessive costs.

D. Example from Egypt

Egypt has recently undertaken significant restructuring of the electricity industry, reorganizing government owned power companies and introducing foreign direct investment. Egypt established the Egyptian Electric Utility and Consumer Protection Regulatory Agency (EEUCPRA), with authority to regulate activities in the electricity industry. The Agency has established a benchmarking system to monitor performance of licensed companies on a range of technical and financial indicators. The Agency incorporated all the filing requirements for the benchmarking system into framework license documents, which all regulated electric generation, transmission and distribution companies have signed. Through the licenses, regulated companies know precisely what information is required to be filed on what schedule. The indicators were selected in a collaborative process that included representatives of the Agency staff and regulated companies.

Output from the benchmarking system is designed to be easy for the public to understand, with robust capabilities for historic comparisons, international comparisons, and root cause analysis. The end result will be to generate performance reports at unit, station, company and sector levels using a standardized format on a regular basis. EEUCPRA also plans to publish performance reports for companies, public and media to review.

Conclusions and Summary

Benchmarking is increasingly used as a tool in regulatory commissions to monitor the performance of regulated companies, leading to improved tariff setting, quality of service standards and other regulatory instruments. There is a wealth of information about utility performance available on the Internet, in large part, due to pressure from regulatory commissions. Through the use of an effective benchmarking system, regulatory commissions can establish credible targets for performance improvement. Benchmarking can stimulate competitive behavior through comparative performance analysis and information sharing. Published results of continual benchmarking enhance transparency, stabilize markets and improve predictability of market risk.

For more information, please visit www.maryclarkwebster.com

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