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Power Technologies International A Shaw Group Company. COMPARISON OF DISTRIBUTION BUSINESS' SERVICE PERFORMANCE - PERFORMANCE BASED REGULATION Srdjan Ćurčić and Scott Reid 13 May 2003 www.shawgrp.com/PTI/ www.shawgrp.com/consultants/. Regulation of monopolies.

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Power Technologies International A Shaw Group Company

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Power Technologies InternationalA Shaw Group Company


Srdjan Ćurčić and Scott Reid

13 May 2003



Regulation of monopolies

  • On behalf of consumers, the regulator determines the contract between consumers and electricity monopoly businesses

The regulator sets the deal

Price the consumers pay

Service the consumers receive from electricity monopolies

One of the crucial roles for the regulator is to protect consumers interests

The problem

  • What is the level of service the consumers want to purchase from electricity monopolies, like distribution businesses?

  • What is the economically efficient price for such a service?

  • How to determine these essential parameters for the deal?

  • How to implement them?

A good, comprehensive & practical solution is illusive

The regulator does not have an easy and practical solution at hand

Current approach for DNOs in the UK

  • Based on past service performance DNOs and Ofgem agreed annual service performance targets up to 2005

From April 2002, IIP as a business driver has introduced market-like forces

What is considered in the UK

  • Comparison of service performance between DNOs

  • Initially floated idea:

    • Competition between DNOs in service performance delivered to consumers

    • Introduction of market-like forces where less efficient DNOs would pay penalties to more efficient DNOs

  • Strong opposition from DNOs

This required a robust, effective and practical comparison methodology

Service performance comparison

  • There are differences between DNOs:

    • Topographic factors

    • Demographic factors

    • Inherited factors

  • The industry is undergoing a consultation on comparison methodologyproposed, which

    • Disagreggate DNOs service performance based on topographic and demographic factors; and

    • Compares disaggregated service performance elements directly

Such a performance comparison aims to expose management differences

Some issues with the comparison model proposed

  • Are disagreggared performance elements proposed comparable enough?

    (Ofgem and consumers are interested only in a broad picture)

  • How can DNOs effectively finance performance improvements?

    (Particularly of interest to DNOs with poor service performance)

  • Should any financial incentives/penalties be associated with such a comparison?

Ofgem, consumers & DNOs are still considering the right way forward

Possible benefits from a service performance comparison

  • Better informed consumers on service they purchase

  • Better informed Ofgem & DNOs so to better focus their efforts in improving service performance the consumers are receiving

  • Reversing, to an extent, the loss of comparators (as DNOs are merging)

  • Thus better informed DPCR process

Any comparison model would need time to learn about it and improve it

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