22 Sep 2011

How do we know when a utility is efficient?

GS and I had another exchange of emails based on this post on utility performance, in which he said:
How nice would it be if the regulators published a metrics drive comparison of utilities? Then they could actually drive some efficiencies through things like ROE incentives for meeting prescribed benchmarks!
Well, we're getting closer to that goal, via benchmarking initiatives like the International Benchmarking Network for Water and Sanitation Utilities (IBNET), which -- unfortunately -- covers very few developed countries.

That said, we know what we need: better ways to measure and improve performance. To that end, I just uploaded a longer version of my post/idea on using insurance to improve performance at water utilities by creating virtual, or second-hand, competition among water utilities via the price they pay for insurance against service interruptions, etc.

"Creating Utility Competition Via Performance-focused Insurance" [link]

A monopolistic urban water supplier may succeed or fail in providing good service to its captive customers. Regulators can use benchmarks to rank performance and create virtual competition, but quantified outputs are imperfectly correlated with outcomes that matter to customers. Even worse, regulators face weak incentives to identify and target these outcomes. This paper suggests that insurance companies can supplement regulatory effort while improving outcomes, by providing policies based on difficult-to-measure factors such as water managers' effort and talent. Insurance will protect consumers from paying too much for water service or experiencing too many service interruptions.

It is DEFINITELY a draft, so please give me your comments and suggestions on how to improve the idea. I am also looking for earlier expressions of similar ideas, to make sure that I do not unintentionally re-invent the wheel.