House of Commons - Trade and Industry

Select Committee on Trade and Industry First Report

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 final—29 November—proposals 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 insufficient—less 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 whether—given that the targets are coupled with higher potential penalties for failing to meet them—they 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