7 Quality of Service targets
74. In our Report on Network Resilience earlier this
year, we acknowledged the high standard of resilience of the British
electricity network: for the distribution networks in 2001-02,
the average annual power outage rate[89]
("Customer Interruptions") was 87.40 per 100 customers,
and the average annual duration of power cuts ("Customer
Minutes Lost") was 83.7 minutes.[90]
However, we observed that public tolerance of interruptions to
electricity supplies appeared to us to be decreasing, and that
we thought customers would welcome still higher standards. In
its September proposals, Ofgem set tougher targets overall for
minimising Customer Interruptions (an improvement of about five
percent) and Customer Minutes Lost (an improvement of about 12
percent) in the next price control period.[91]
Ofgem's final29 Novemberproposals confirm these
targets.[92] While some
companies, which at present have a very good performance on the
number of power cuts,[93]
would not be expected to improve their performance over the next
five years, others have been given the target of a steady reduction
in the number of interruptions; and most (11 of the 14) companies
would also be expected to reduce the duration of power cuts. As
our witnesses from Ofgem said, "It is about bringing all
of the companies up to the standards that are already being delivered
by the best."[94]
75. Ofgem took into account the targets for reducing
Customer Interruptions in setting both capital and operational
expenditure allowances: the so-called Quality of Service allowances.
(In the context of this cost allowance, capital expenditure would
cover things such as automation, while operational expenditure
would cover restoration costs: for example, the employment of
more staff to restore power supplies once interrupted.) Ofgem's
calculation of the allowances was based on an assessment of the
marginal costs of improvement. The outcome varied widely from
company to company: for half of the 14 companies, Ofgem allowed
for absolutely no capital expenditure to reduce Customer Interruption
rates over the next five years, but these were the companies whose
Quality of Service targets Ofgem proposed to freeze at current
performance levels.[95]
In the case of two companies, the capital expenditure allowance
for Quality of Service improvements in the final proposals was
lower than that in the original (June) proposals. However, all
14 companies would, under the 29 November paper, receive operational
expenditure allowances ("restoration costs"); three
of the four companies required to make the most effort in increasing
quality of service on minimising the duration of power cuts would
receive above average restoration cost allowances, and the fourth
would receive one of the highest capital expenditure allowances;[96]
and for all 14 the proposed allowance had been increased since
the original proposals.[97]
76. We asked the Energy Networks Association whether
the Quality of Service standards proposed by Ofgem were achievable.
They replied that the overall targets were not much higher than
at present; but the DNOs were very concerned that the amount of
extra money allowed for effecting the improvements was insufficientless
than £1 per customer. They compared this with the £2.30
per customer which, they said, had been the allowance in the 2000-05
price control period.[98]
Furthermore, Ofgem proposed that, for the 2005-10 price control
period, the companies should be eligible for fines of up to three
percent of their revenue for failing to meet the Quality of Service
targets, whereas the maximum fine in the current price control
period was two percent of revenue.[99]
77. Ofgem has made explicit provision for certain
types of exceptional events not under companies' control. Apart
from all the categories of severe weather,[100]
these would also include a fault on a transmission or other connected
network, third party damage such as vandalism or terrorism, damage
from birds and animals where this could not reasonably have been
prevented, and problems such as restricted access because of foot
and mouth disease. They would not, however, include incidents
such as failure of protection equipment or fires resulting from
a fault with a DNO's own equipment. Subject to an audit by Ofgem
to ensure that the DNO had taken all appropriate measures to mitigate
the problem, such events would be deducted from the relevant companies'
CI and CML tallies and replaced by an equivalent number of days'
average performance, so that DNOs should not be penalised under
the Quality of Service scheme for events outside their control.[101]
Ofgem has also set a special allowance for exceptional events:
first to allow DNOs to invest to increase network resilience,
or to improve restoration times, or to cover the cost of insuring
against storm damage; and secondly, to take into account the huge
restoration and compensation costs of dealing with very rare,
"1 in 20 year" events.[102]
As EDF-LPN's network is almost entirely underground, Ofgem has
not set such an allowance for that company.[103]
78. Ofgem's interruption costs allowances do seem
modest: £111.6 million of capital expenditure over the five
years for all distribution companies, and £113.5 million
for restoration costs over the same period.[104]
There is general agreement that quality of service has improved
since the privatisation of the industry, despite the regulator's
downward pressure on the prices charged by these companies.[105]
Ofgem cited an improvement in performance of about seven percent
since it introduced the existing quality of service incentive
scheme in 2001-02. Its aim was to make a further improvement of
about 12 percent against 2003-04 levels over the next price control
period without imposing substantial additional costs on consumers.[106]
Ofgem's stance is that there are greater efficiencies to be wrung
out of the DNOs and that these together with the interruption
cost allowances should be enough to achieve the desired improvements
in service.
79. On the basis
of the ENA's and Ofgem's figures, an allowance of £2.30 per
customer produced a seven percent improvement in quality of service
over 2000-05, while Ofgem's targets for 2005-10 are a 12 percent
improvement on an allowance of less than one pound per customer.
This comparison may be misleading, however, if Ofgem has in this
price control review better matched allowances to companies whose
performance standards can in practice be increased most: in other
words less, but better targeted, expenditure. Ofgem would doubtless
argue that its requirements for improved standards have been carefully
balanced by its financial allowances for achieving these improvements,
and a company by company analysis of Ofgem's proposals supports
that. However, given the recent rate of improvement, Ofgem's targets
appear ambitious. Without a very detailed analysis of the position
of individual companies which we are not in a position to do,
we cannot say whethergiven that the targets are coupled
with higher potential penalties for failing to meet themthey
are nevertheless fair.
89 This covers both unplanned interruptions (caused
by things such as bad weather or faults) and planned interruptions
(for maintenance or the replacement of equipment). Back
90
Ofgem's 2001-02 Electricity Distribution Quality of Supply
Report, dated June 2003: cited in Third Report, paragraph
11 and footnote 21 Back
91
September proposals, Tables 3.1 (Targets for Customer Interruptions)
and 3.2 (Targets for Customer Minutes Lost); see also Q 8 (Part
3) The current service levels on which the companies are expected
to improve were calculated from an average of actual performance
over the three years 2001/02 to 2003/04. Back
92
November proposals, Tables 4.3 and 4.4 Back
93
These tend to be the companies covering a largely urban area,
and therefore with most of their cables underground (for example,
EDF-LPN and Manweb). Back
94
Q 8 (Part 2) Back
95
See November proposals, Table 4.7. The figures are identical to
those in the September proposals, Table 3.3. Back
96
The three companies were CN-Midlands, CN-East Midlands and SP
Distribution; the fourth was EDF-Southern. Back
97
September proposals, Table 3.3: Interruption cost allowances (which
shows the difference from the initial, June, proposals) Back
98
Q 41-42 (Part 2) Back
99
Q 45 (Part 2) Back
100
Described in paragraphs 57-59 above Back
101
September proposals, paras 3.29-3.30 and 3.38-3.49 Back
102
Ibid, paras 3.50-3.53 Back
103
November proposals, para 4.18 Back
104
September proposals, Table 3.3 Back
105
A reduction of 11 percent in CIs and a reduction of 30 percent
in CMLs since privatisation: Q 2 (Part 2) Back
106
June proposals, Summary; Q 8 (Part 2) Back
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