Slide 1 CIRED May 2003 Power Technologies International A Shaw Group Company COMPARISON OF DISTRIBUTION BUSINESS' SERVICE PERFORMANCE - PERFORMANCE BASED REGULATION Srdjan Ćurčić and Scott Reid 13 May

Slide 2 CIERD May 2003 Regulation of monopolies On behalf of consumers, the regulator determines the contract between consumers and electricity monopoly businesses 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 regulator sets the deal

Slide 3 CIERD May 2003 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? The regulator does not have an easy and practical solution at hand A good, comprehensive & practical solution is illusive

Slide 4 CIERD May 2003 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

Slide 5 CIERD May 2003 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

Slide 6 CIERD May 2003 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

Slide 7 CIERD May 2003 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

Slide 8 CIERD May 2003 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