Holding Distribution Utilities Liable for Outage Costs: An Economic Look

Abstract

Storm-related service outages in electricity and telecommunications have created public controversies regarding the adequacy of ex ante efforts to prevent outages and ex post efforts to restore power. Product liability rules, used to promote quality of service throughout the economy, might seem to offer a solution to this problem in the utility context. Strict liability rules avoid the need for determining whether utilities were appropriately careful but increase ratepayer costs because of moral hazard and, in effect, force ratepayers to buy outage insurance from the utility. By leaving customers exposed to damage, negligence rules can avoid these shortcomings but force upon regulators and courts the need to make difficult decisions regarding efficient care levels. Profit regulation, risk aversion, regulatory commitment failures, and distributional considerations add further complications. Still, the consideration of liability rules may provide worthwhile reminders that increased reliability is neither free nor guaranteed by public provision of service.