IMPROVEMENTS IN THE COMPENSATION
ARRANGEMENTS
53. The emergency highlighted the shortcomings of
existing arrangements for compensation payments in cases of severe
weather. Ofgem told us that during initial work on its distribution
price control review (the results of which would take effect from
April 2005) and ongoing work on the determination process, it
had found important weaknesses in the current standards of performance
arrangements and in particular the application of exemptions by
DNOs. It had concluded that there was a lack of clarity in incentives
to electricity distribution companies to maintain standards; there
were delays in compensation reaching consumers; as was evidenced
in this event, consumers were confused about the circumstances
under which compensation was payable; and the determination process
was highly resource-intensive for both Ofgem and energywatch.
Ofgem was considering new arrangements to be introduced from April
2005, as part of the price control review.
54. Interim arrangements were introduced on 13 November
2003 to cover major events before the next price control, and
to simplify the determination process. For small, localised events,
the normal arrangements would continue to apply. For events at
the other end of the scale, that is in cases of extreme weather
where supply to more than 25 percent of a distribution company's
customers was interrupted or where conditions precluded actions
to restore supply,[61]
Ofgem and the companies concerned would agree an appropriate compensation
regime. For all other severe weather events,[62]
where supply to more than two percent of a distribution company's
customers was interrupted, or where there were more than seven
times the average number of faults on the high voltage network,
a simplified compensation procedure would be implemented. Customers
who registered a written claim to their distribution network operator
within one month of the restoration of their supply would be eligible
for compensation of £25 after being off supply for 48 hours
and £25 for each subsequent period of disconnection up to
a maximum amount of £200. Part of the cost of compensation
would be met directly by the company; part would be funded by
subsequent increased charges to customers.
55. The compensation system proposed by Ofgem as
part of its consultation on the new price control due to come
into force in April builds upon these interim arrangements.[63]
The regulator envisages the banding of weather conditions into
four categories for the purpose of establishing standards of performance
for supply restoration and the determination of appropriate compensation
to customers.
56. Normal conditions would be defined
as periods where there are no weather events causing more than
eight times the average number of faults in a DNO network in a
24 hour period. Under such conditions domestic consumers would
be entitled to £50 if they were deprived of power for 18
hours (non-domestic consumers would get £100), with a further
£25 for each 12 hour period thereafter. There would be no
limit to the total compensation payable to an individual consumer.
57. Under Ofgem's proposals, severe weather conditions
would be divided into three categories. Category 1
would cover cases where lightning strikes caused eight or more
times the average number of higher voltage faults in a 24 hour
period provided that fewer than 35 percent of exposed customers
were affected;[64] and
other weather conditions which induced 8-13 times the average
number of faults provided that fewer than 35 percent of exposed
customers were affected. Every affected consumer would be entitled
to compensation of £25 if they were off supply for 24 hours
and £25 for each subsequent 12 hour period up to a limit
of £200.
58. Category 2 events would be defined
as non-lightning events producing 13 or more times the average
number of faults affecting less than 35 percent of exposed customers.
In these conditions every customer would be paid £25 if they
were without supply for 48 hours and £25 for each subsequent
12 hour period. The maximum payment would again be limited to
£200.
59. Category 3 would cover any event
where more than 35 percent of a company's exposed customers were
affected, i.e. very large events such as occurred in some areas
in October 2002. Ofgem has proposed that the trigger period for
each event would be determined on a sliding scale which would
reflect the scale of the event in terms of the number of customers
affected expressed as a proportion of the potential number. The
trigger period would be calculated by the formula:
48 hours multiplied by the number of customers
affected divided by 35% of exposed customers
Customers would be eligible for compensation of £25
if they were off supply for the trigger period and £25 for
each subsequent 12 hours up to a maximum of £200.
60. Under all weather conditions, there will be a
delay in the clock starting to count towards the trigger period
for compensation if snow, flooding or ice accretion directly prevents
the DNO from carrying out the work necessary to restore the customer's
supply.[65] Furthermore,
all DNOs affected by a Category 3 event will be exempt from paying
compensation to customers if for any of those DNOs more than 60
percent of their exposed customers experienced a power cut.[66]
61. Ofgem has also acted to remove the financial
incentive on DNOs to refrain from informing customers that they
may be entitled to compensation after a power cut, whether in
normal or in severe weather conditions. Ofgem has decided to ensure
that the penalty to DNOs is the same whether or not the customer
claims. Where a DNO does not make the payment to the customer,
it will suffer an equivalent reduction in its revenue. Ofgem adds:
"DNOs should make reasonable endeavours
to pay out automatically under the standards where possible and
should be more proactive in contacting affected customers to make
them aware of their right to compensation."[67]
62. We
consider that, although the proposed new compensation mechanism
is rather complex, it and the interim arrangements from which
the new system has been developed represent a marked improvement
on the previous compensation scheme. DNOs should be able to give
clear, unambiguous advice to customers about their entitlement
to compensation. In addition, greater precision in the definition
of the circumstances under which compensation is payable should
reduce the number of disputed cases to the regulator for determination,
so settlement of compensation claims should be faster.
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