Electricity Distribution Annual Report for 2008-09 and … · Office of Gas and Electricity Markets Electricity Distribution Annual Report 2008-09 and 2009-10 xx March 2011 Table

Office of Gas and Electricity Markets

Promoting choice and value for all gas and electricity customers

Document Type: Annual Report

Ref: 50/11

Electricity Distribution Annual Report for 2008-09 and 2009-10

Overview:

As they have regional monopolies, Ofgem controls the revenues DNOs can collect from

network users. In return for these revenues, the companies are required to provide

customers with a secure and reliable network and a range of other services, such as

timely connections and effective complaint handling.

DNOs provide us information each year to help us monitor performance against their

price control obligations. This report presents the DNOs‟ performance in 2008-09 and

2009-10. It also sets out an overall picture of trends in performance from 2005-06 to

2009-10, the fourth electricity distribution price control period. The report covers key

areas such as customer service, connections, the environment and providing network

reliability in a cost effective manner.

We have put new requirements on the DNOs to engage more effectively with their

stakeholders and to use stakeholder views in making business decisions. This report

aims to give stakeholders the key information they need to participate in this process.

We seek feedback from stakeholders on the content and format of this report.

Date of Publication: 31 March 2011

Target Audience: Consumers and their representatives, electricity distribution

network operators (DNOs), suppliers, environmental organisations, independent

distribution network operators, independent connection providers, investors and other

interested parties.

Contact name and details: Peter Hicks, Senior Analyst, Electricity Distribution

Costs and Outputs

Tel: 020 7901 3853

Email: [email protected]

Team: Electricity Distribution Costs and Outputs


Electricity Distribution Annual Report 2008-09 and 2009-10 xx March 2011

Electricity distribution network operators (DNOs) provide information each year to

Ofgem to help us monitor performance against their price control obligations. It is

our job to ensure that the companies do not collect more revenue from customers

than the regulations allow. In return for this revenue they must provide the services

and meet the standards set out in their licences. Customers and other stakeholders

play an important part in ensuring that they receive value for money by raising a

complaint when they do not get the service they are due or by contacting the

companies to set out where they think they could be performing better.

In October 2010, we introduced RIIO, our new approach to network regulation that

aims to promote smarter gas and electricity networks for a low carbon future and

puts sustainability alongside consumers at the heart of what network companies do.

The network companies are now required to obtain stakeholder input when

developing their long term business plans and can be rewarded if they demonstrate

they have been effective in responding to stakeholder views. This report aims to give

stakeholders the information they need to engage in this way.

This report brings together and summarises a number of key indicators from

separate comprehensive and technical documents we have previously published plus

previously unpublished information for 2008-09 and 2009-10. This is the first

consolidated report of its kind to be published by Ofgem. We seek feedback on the

content and presentation of this report so that we can continue to improve the

accessibility of the information we publish.

2008-09 Quality of Service Report (Reference 162/09)




Electricity Distribution Cost Review 2007-2008 (Reference 165/08)



Connections Industry Review 2009-10 (Reference 20/11)




Connections Industry Review 2005-06

Context

Associated Documents

http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Documents1/200809%20Electricity%20Distribution%20Quality%20of%20Service%20report.doc.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Documents1/2007.08%20Quality%20of%20Service%20Report%20v2.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Documents1/2006-07%20Electricity%20Distribution%20Quality%20of%20Service%20Report.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Documents1/16330-204_06.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/CostRep/Documents1/Electricity%20Dist%20Cost%20Review%202007%202008.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/CostRep/Documents1/Elec%20Dist%20Cost%20Review%20200607%20ref%2028907.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/CostRep/Documents1/16839-1807.pdf

http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Documents1/CIR%2009-10.pdf

http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Documents1/CIR%20report%20%20final%20draft.pdf

http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Documents1/Connections%20Industry%20Review%202007%2008.pdf

http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Documents1/Connections%20Industry%20Review%202006-07.pdf

http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Documents1/15298-160_06.pdf



Table of Contents

Summary ........................................................................................... 1 Purpose of this report .................................................................................... 1 DNO performance ......................................................................................... 1 Future reports .............................................................................................. 2

1. Background and Introduction ........................................................ 3 Electricity Distribution in Great Britain ............................................................. 3 Ofgem and stakeholder role in driving performance improvements ...................... 4 Objectives .................................................................................................... 4 Contact information for stakeholders ............................................................... 5

2. Overview of performance in 2008-09, 2009-10 and DPCR4 ........... 7 DNO performance snapshot for 2008-09 and 2009-10 ....................................... 7 DNO performance overview for DPCR4 .......................................................... 11

3. Network reliability ....................................................................... 15 Performance against interruptions targets in 2009-10 ..................................... 15 Guaranteed Standards of performance .......................................................... 19 Transition to DPCR5 and RIIO-ED1 ................................................................ 21

4. Customer service ......................................................................... 23 Telephone response performance .................................................................. 23

Quality of response .................................................................................. 23 Speed of response ................................................................................... 25

Customer Service Reward Scheme ................................................................ 28 Transition to DPCR5 and RIIO-ED1 ................................................................ 30

5. Connections ................................................................................. 31 Competition in Connections .......................................................................... 31 Provision of quotations ................................................................................ 33 Transition to DPCR5 and RIIO-ED1 ................................................................ 34

6. Environment ................................................................................ 35 Network Loss Incentive ................................................................................ 35 Undergrounding in Areas of Outstanding Natural Beauty and National Parks ....... 38 Transition to DPCR5 and RIIO-ED1 ................................................................ 39

7. Network Investment and Expenditure ......................................... 41 Reported expenditure in 2008-09 against DPCR4 allowances ............................ 41 Reported expenditure in 2009-10 against DPCR4 allowances ............................ 42 Cumulative outturn expenditure DPCR4 (2005-06 to 2009-10) ......................... 44 Return on Regulatory Equity ......................................................................... 45 Pensions .................................................................................................... 46 Regulatory Asset Value ................................................................................ 47 Transition to DPCR5 and RIIO-ED1 ................................................................ 49

8. Next steps – DPCR5 and RIIO-ED1 ............................................... 50 Lessons learned from 2008-09 and 2009-10 process ....................................... 50 Future Work Programme .............................................................................. 50

Appendices ...................................................................................... 52 Appendix 1 - Responses and Questions ........................................... 53 Appendix 2 – Distribution Network Operator contact information ... 54 Appendix 3 - The Authority’s Powers and Duties ............................. 55 Appendix 4 - Glossary ...................................................................... 58 Appendix 5 - Feedback Questionnaire ............................................. 63

Office of Gas and Electricity Markets 1


Summary

Purpose of this report

Customers depend on distribution network operators (DNOs) to maintain high levels

of network reliability. DNOs also have an important customer facing role. When they

provide connections, restore outages and respond to complaints, customers expect

to be given the information they require and that DNOs will deliver the service they

have promised to reasonable timescales. DNOs also have a vital part to play in

facilitating the transition to a low carbon economy. They need to contain their own

carbon footprint, and to accommodate more intermittent generation and low carbon

technologies, such as electric vehicles, in a cost effective way. The importance of the

DNOs‟ role will escalate as we strive to meet the UK‟s 2020 and 2050 targets.1

Electricity customers currently pay £4.5 billion annually for electricity distribution.

This amounts to approximately 15 per cent of an average domestic customer‟s bill or

bout £80 per year based on consumption of 3300kWh of electricity.2

Ofgem regulates each of Great Britain‟s 14 DNOs to protect the interests of current

and future customers. We put in place a price control, which sets the total revenues

that each DNO may recover from customers at a level that allows an efficient

operator to finance its activities. We also place incentives on DNOs to innovate and

identify more efficient ways to provide an appropriate level of network capacity,

security, reliability and quality of service. DNOs face financial rewards or penalties

commensurate with their performance against these measures. Rewards are funded

by customers. Penalties reduce the revenues a DNO can recover from its customers.

Network users and other stakeholders (such as local authorities and energy retailers)

can also encourage the DNOs to improve their performance. They can do this by

raising complaints where a specific service has not been delivered. They can also, if

they wish, engage with the DNOs to help them understand in more detail what

network users require and what improvements they are prepared to pay for. The

purpose of the report is to help network users understand what service they have

received in return for the payments they made to DNOs over the 2008-2010 period,

and to provide them the information they need, should they want to discuss this

performance with their local DNO.

DNO performance

Chapters 2 to 7 set out the comparative performance of each DNO in the key areas

specified in DPCR4 including: customer service, connections, the environment and

providing network reliability in a cost effective manner. In the last two years of

1 http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0136:0148:EN:PDF 2 In 2009-10 customers paid approximately £3.6 billion for electricity distribution. This amounts to approximately 15 per cent of an average domestic customers' bill or about £76 per year based on consumption of 3300kW of electricity

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:140:0136:0148:EN:PDF



DPCR4, the companies which performed best across all areas of performance were

WPD S Wales, WPD S West and SSE Hydro. These companies exceeded targets set

for customer service and network reliability (customer interruptions and customer

minutes lost). Over these years, performance was worst in areas such as customer

minutes lost and in responding to connection requests. Six DNOs failed to meet their

licence obligations relating to connections. We note that performance against

distribution losses will not be finalised until 2012.

Across the entire DPCR4 period, we saw an improvement in the average performance

of the DNOs in the areas of customer service and network reliability. DNOs also

spent 31.0 per cent of the total allowance for undergrounding in Areas of

Outstanding Natural Beauty and National Parks. Overall, the companies managed

their networks within 6.7 per cent of the capital expenditure allowances set as part of

DPCR4 but overspent on average by 9.1 per cent against operating expenditure

allowances. DNOs that achieved the highest indicative return to shareholders were

both cost efficient and performed well against the DPCR4 incentives.

Future reports

In our fifth electricity distribution price control (DPCR5) we agreed additional

performance indicators, a new set of performance targets and allowed revenues with

the DNOs for the five year period which commenced on 1 April 2010. We will report

regularly on DNOs‟ performance under these new arrangements. Each chapter

outlines the new performance indicators specific to that area. All the new

performance indicators are set out in chapter 8.

Part of the new arrangements provide DNOs with an opportunity to earn rewards if

they are particularly successful in understanding and responding to stakeholder

requirements. This should mean that the companies are actively seeking and are

receptive to views about the performance set out in this, and future reports. It

follows that we need to provide information on DNO performance in a meaningful

and user friendly format to allow stakeholders to track and compare the DNOs‟

performance. This report is our first attempt to summarise the range of detailed and

technical information we receive from the companies. However, we expect to make

some refinements in future reports and we are actively considering whether

stakeholders would find it more convenient if this was provided in a web-based

interactive format. We seek comments on the content and format of this report.

In October 2010, Ofgem introduced a new approach to network regulation. The RIIO

model (revenue = incentives + innovation + outputs) has been designed to promote

smarter gas and electricity networks for a low carbon future.3 The sixth electricity

distribution price control will be set using the RIIO model. This new framework

emphasises stakeholder input into the price control process, the DNOs‟ own business

plans and on ongoing business decisions. This requires network companies to engage

much more thoroughly with stakeholders to ensure their requirements are met.

Access to good information on how the companies are performing is critical if

stakeholders are to play this role.

3 http://www.ofgem.gov.uk/Networks/rpix20/Pages/RPIX20.aspx

http://www.ofgem.gov.uk/Networks/rpix20/Pages/RPIX20.aspx



1. Background and Introduction

Electricity Distribution in Great Britain

1.1. Electricity Distribution systems are networks of overhead wires and underground

cables that transport electricity across Great Britain. Electricity is generated at power

plants. The transmission system then conveys this into local distribution networks for

onward transportation to customers.

1.2. There are 14 electricity distribution network operators (DNOs) in Great Britain.

The 14 distribution licences are owned by one of seven companies. Figure 1.1 shows

the name and location of each licence owner and distribution system.

Figure 1.1 Map of DNOs in Great Britain

1. Central Networks: West (CN West)

2. Central Networks: East (CN East)

3. Electricity North West Limited (ENWL)

4. CE Electric UK: Northern Electric

Distribution Limited (CE NEDL)

5. CE Electric UK: Yorkshire Electricity

Distribution plc (CE YEDL)

6. Western Power Distribution: South Wales

(WPD S Wales)

7. Western Power Distribution: South West

(WPD S West)

8. UK Power Networks:4 London Power

Networks (UKPN LPN)

9. UK Power Networks: South East Power

Networks (UKPN SEPN)

10. UK Power Networks: Eastern Power

Networks (UKPN EPN)

11. Scottish Power: Distribution (SP Distribution)

12. Scottish Power: Manweb (SP Manweb)

13. Scottish & Southern Energy: Hydro (SSE

Hydro)

14. Scottish & Southern Energy: Southern

Electric Power Distribution (SSE Southern)

1.3. DNOs are responsible for operating, extending and maintaining their distribution

systems. Customers expect a safe and reliable supply and for DNOs to promptly

restore supply in the event of an interruption and to respond effectively to

complaints, queries and requests for new connections or alterations. Customers also

4 During the DPCR4 period UK Power Networks was owned by Electricite de France S.A (EDF Energy).



expect DNOs to play a role in tackling climate change and to adapt their practices

towards a low carbon future.

1.4. A summary of the key physical characteristics of each distribution system is

included in the associated documents published with this report.

Ofgem and stakeholder role in driving performance improvements

1.5. Each DNO is required to report to us each year on various aspects of their

performance. We review this data to ensure that companies adhere to the price

control revenue restrictions and that they comply with their licence conditions. We

also use this information when we review the price control arrangements and look for

better ways to incentivise the companies to continue to improve. We think

stakeholders including customers also have an important role to play in encouraging

the companies to continue to improve their performance. Access to good information

on how the companies are performing is critical if they are to play this role.

1.6. Ofgem is committed to publishing annual reports on the performance of the

DNOs. In the past we have published separate comprehensive and technical

documents on areas such as quality of service (customer service), connections and

costs. This report brings together and summarises a number of key indicators of the

DNOs performance from these reports plus previously unpublished information for

2008-09 and 2009-10.

1.7. This report covers performance in 2008-09, 2009-10 and provides an overview

of performance in the fourth electricity distribution price control (DPCR4) in the

period 1 April 2005 to 31 March 2010 (the last two years of DPCR4 were 2008-09

and 2009-10). That performance is measured against the standards and outputs

designed and implemented in DPCR4.

Objectives

1.8. This report aims to present information in a format that is easy to understand,

allowing stakeholders to compare and track the DNOs overall performance. This is

the first report of its kind that we have published.

1.9. In our open letter dated 17 December 2009 we proposed the composition of the

electricity distribution annual report. Stakeholders generally supported our proposed

approach. We have endeavoured to integrate the comments and suggestions

received during that process and from discussions with our Consumer First panel.5 In

5 Launched in 2008, the Consumer First Panel consists of 100 everyday domestic customers recruited from five locations across Great Britain. The Panel meets regularly to discuss key issues impacting on their participation in the energy market. This helps us improve our understanding of what really matter to consumers and is leading towards making our consultations more consumer focussed and friendly.



particular, this report includes undergrounding undertaken by DNOs in Areas of

Outstanding Natural Beauty and National Parks.

1.10. As a result this document has the following structure:

Chapter 2 – Overview of performance in 2008-09, 2009-10 and DPCR4

Chapter 3 – Network reliability

Chapter 4 – Customer service

Chapter 5 – Connections

Chapter 6 – Environment

Chapter 7 – Network investment and expenditure

Chapter 8 – Next steps – DPCR5 and RIIO-ED1

1.11. Summary tables of the DNOs‟ performance in 2008-09 and 2009-10 are

included in this report. More detailed specific and historical information is available

on our website and in the associated documents published with this report.

1.12. The fifth electricity distribution price control (DPCR5) for the period 1 April

2010 to 31 March 2015 recently commenced. In DPCR5 we introduced a number of

additional incentives and improved output measures that we think better reflect the

areas of performance consumers value. These performance measures will be

progressively added to future versions of this report. These indicators are set out in

each chapter of this report and summarised in chapter 8 of this report.

Contact information for stakeholders

1.13. Stakeholders and in particular customers can contact a number of third parties

should they have a complaint regarding an energy network company. Consumers

that have a complaint about an energy network company should direct their

complaint to the company in the first instance. If a consumer considers the company

has not satisfactorily resolved the issue they can contact one of the organisations

below.

1.14. Consumer Direct is a telephone and online service offering information and

advice on consumer issues. It is funded by the Office of Fair Trading and delivered in

partnership with Local Authority Trading Standards Services. It provides clear,

practical and impartial advice to help consumers sort out problems and

disagreements with suppliers of goods or services. It offers help and advice to every

consumer in Great Britain who is buying or has bought goods or services. More

information about Consumer Direct can be found on their website:

www.consumerdirect.gov.uk.

1.15. Consumer Focus is a consumer advocacy body. It operates across the whole of

the economy, including the energy sector, promoting and campaigning for better

http://www.consumerdirect.gov.uk/



access, value and service levels for consumers. Consumer Focus can investigate any

consumer complaint if it is in the general interest of consumers. More information

about Consumer Focus can be found on their website: www.consumerfocus.org.uk.

1.16. The Energy Ombudsman is an independent and impartial body. It can

investigate complaints from domestic and micro-business customers about their

energy supplier or network operator and decide what actions should be taken when

the parties cannot come to an agreement. More information about the Energy

Ombudsman is available on their website: www.energy-ombudsman.org.uk.

1.17. Energy suppliers and network operators offer a range of services free, known

as the priority services register, to their most vulnerable customers. These services

are free to join and are available to domestic gas and electricity customers that are

one of the following: of pensionable age, have a disability, have a hearing and or

visual impairment or have long-term ill health. For more information about the

priority services register contact your local energy supplier or network operator.

Contact details for all the DNOs are set out in appendix 2 of this report.

http://www.consumerfocus.org.uk/

http://www.energy-ombudsman.org.uk/



2. Overview of performance in 2008-09, 2009-10 and DPCR4

2.1. This chapter provides an snapshot of the distribution network operators (DNOs)

performance against four key indicators in 2008-09, 2009-10 and an overview of

performance in the fourth electricity distribution price control (DPCR4) (1 April 2005

to 31 March 2010).

2.2. In October 2010, Ofgem introduced a new framework for network regulation.

The RIIO model (revenue = incentives + innovation + outputs) has been designed to

promote smarter gas and electricity networks for a low carbon future. The sixth

electricity distribution price control will be set using the RIIO model. We will

categorise the outputs DNOs will be expected to deliver into the six primary output

categories below:

1. Customer satisfaction

2. Reliability and availability

3. Safety

4. Connections

5. Environment

6. Social obligations

2.3. The performance snapshots for 2008-09, 2009-10 and overview of DPCR4 are

set out under the RIIO model primary output categories. We note that DPCR4 did not

contain performance measures in respect of the safety or social obligations RIIO

primary output categories. Equally, the DPCR4 requirements were not designed to fit

across the six RIIO output categories. However, presenting performance against

these output areas provides a good indication of the kind of reporting we expect to

be doing in future years.

2.4. We note this is the first attempt to develop and apply traffic light scores to key

performance indicators. We consider the chosen indicators are appropriate but

recognise that the criteria and categorisation applied to attribute a score (green,

amber or red) could be further refined for the future. To that end, we welcome

feedback and comments on how to improve these indicators in the future.

DNO performance snapshot for 2008-09 and 2009-10

2.5. A performance snapshot for 2008-09 and 2009-10 against five key indicators is

set out in tables 2.1 and 2.2 respectively. Below we explain each of these

performance indicators.



Customer satisfaction

2.6. Under the DPCR4 arrangements, the key customer satisfaction performance

indicator was the DNOs‟ quality of responses to telephone calls made by customers

to the company. Each DNO‟s performance on this metric is set out in column A in

the traffic light table below.

2.7. Performance was measured using monthly customer satisfaction surveys. DNOs

were rewarded or penalised based on their overall annual score (out of five).

Performance equal to or greater than 4.5 resulted in a financial reward (scoring

green in the traffic light table below), performance above 4.1 but below 4.5 resulted

in neither a reward nor penalty (scoring amber), while performance below 4.1

resulted in a financial penalty (scoring red).

Reliability and availability

2.8. In the DPCR4 period, we used customer interruptions (CIs) and customer

minutes lost (CMLs) as the indicator of each DNO‟s performance in providing a

reliable network. Each DNO‟s performance on customer interruptions is set out in

column B in the table below. CIs are the average number of unplanned interruptions

experienced (per 100 customers). Each DNO‟s performance on customer minutes lost

is set out in column C. CMLs are the average number of minutes of lost supply (per

customer).

2.9. As part of the price control arrangements, we set targets for CIs and CMLs for

each DNO. Performance against these targets attracted financial rewards and

penalties. Performance better (lower) than the targets resulted in a financial reward,

scoring green in the table below, while performance worse (above) than those

targets resulted in a financial penalty, scoring red.

Connections

2.10. Connections obligations are set out in the Electricity Act 1989 and the standard

licence condition (SLC) 12, 15 and 19. SLC 12 obliges each DNO to provide offers for

connection as soon as reasonably practicable and in any event within three months.

SLC 15 relates to the timeliness of the provision of non-contestable connection

services. Different timescales apply to different connection types and voltage levels.

SLC 19 prohibits the discrimination between classes of consumers. Each DNO‟s

performance in complying with these obligations is set out in column D in the traffic

light table below.

2.11. A DNO that failed to satisfy all its obligations under SLC 15 and SLC 19 scored

red in the table below irrespective of their performance against SLC 12. DNOs that

satisfied SLC 15 and SLC 19 were then scored against their SLC 12 performance.

DNOs‟ whose maximum amount of time to satisfy the SLC 12 criteria across the four

voltage levels was less than three months scored green, a maximum of three months



days in two or more voltage levels scored amber and a maximum of greater than

three months in one or more voltage levels scored red.

Environment

2.12. In the DPCR4 period, the key environmental performance indicator for DNOs

was the percentage of electricity lost from the distribution system. Each DNO‟s

performance against the targets set for them as part of the price control

arrangements is set out in column E in the table below. Performance lower than the

targets set in DPCR4 resulted in a financial reward (scoring green in the table below)

while performance above the target resulted in a financial penalty (scoring red).

2.13. Losses performance in any particular year of the DPCR4 period is an imperfect

measure of how successful the DNO has been in containing losses. This is because,

amongst other things, the measurement of losses relies on settlement data which is

only finalised two years after the year in question. We have included a shaded

version of these traffic light indicators for completeness, and because annual

performance has driven penalties and rewards to the DNOs which customers have

funded or benefitted from in terms of lower prices. However, a full picture of DNO

performance in this area will only be available in 2012 when settlement data is

finalised.6

6 Caution should be exercised in using losses data for comparative purposes (either between DNOs or across time). The reasons for this are set out in more detail in chapter 6 of this report.



Performance summary

2.14. Putting distribution losses to one side, DNOs that performed well against each

of the four key performance indicators in 2008-09 were WPD S Wales, WPD S West

and SSE Hydro. Each of these DNOs achieved a green score in three or more of the

categories. DNOs that did not perform as well were CE YEDL, the three UKPN

businesses and SP Manweb. Each of these DNOs achieved three red scores or two

red scores and one amber score. In 2008-09 DNOs overall performed was worst

against their CML targets and connections performance.

Table 2.1 DNO performance snapshot for 2008-09

Performance

indicator A B C D E

CN West

CN East

ENWL

CE NEDL

CE YEDL

WPD S Wales

WPD S West

UKPN LPN

UKPN SEPN

UKPN EPN

SP Distribution

SP Manweb

SSE Hydro

SSE Southern

Note: A – Quality of telephone response B – Customer interruptions C – Customer minutes lost D – Connections E – Distribution losses



2.15. In 2009-10, and again putting distribution losses to one side, more DNOs

achieved green scores in three or more performance categories. These were CN East,

ENWL, WPD S Wales, WPD S West and SSE Hydro. DNOs that did not perform as well

were CE YEDL and UK EPN. Each of these DNOs achieved two red scores and one

amber score. In 2009-10 DNOs performed worst against their CML targets and,

again, connections indicators.

Table 2.2 DNO performance snapshot for 2009-10

Performance indicator

A B C D E

CN West

CN East

ENWL

CE NEDL

CE YEDL

WPD S Wales

WPD S West

UKPN LPN

UKPN SEPN

UKPN EPN

SP Distribution

SP Manweb

SSE Hydro

SSE Southern


DNO performance overview for DPCR4

2.16. An overview of DNO performance for the DPCR4 period is set out in table 2.3.



Customer satisfaction

2.17. Quality of telephone response performance equal to or greater than 4.5 in two

or more years scored green, performance above 4.1 in each year scored amber,

while performance below 4.1 in any year scored red. Each DNO‟s performance on this

metric is set out in column A in the traffic light table below.

Reliability and availability

2.18. CI and CML performance better (lower) than the targets in every year of

DPCR4 scored green, performance better than the targets in four or three years

scored amber, while performance worse than the targets in three or more years

scored red. CIs performance is set out in column B and CMLs performance is set out

in column C in traffic light table below.

Connection terms

2.19. There was no single aggregate performance measure linked to connections

performance in every year of DPCR4. For example SLC 12 did not apply until

2008-09. Column D of table 2.3 is a composite indicator based on a DNOs‟

performance in 2008-09 and 2009-10. A green score in both 2008-09 and 2009-10

scored green, a red in either or both 2008-09 and 2009-10 scored red and all other

combinations scored amber.

Environmental impact

2.20. Distribution losses performance better (lower) than the targets in every year of

DPCR4 scored green, performance better than the targets in four or three years

scored amber, while performance worse than the targets in three or more years

scored red. This performance is set out in column E below. There are a number of

caveats regarding losses performance these are noted at paragraph 6.8.

Performance summary

2.21. Putting distribution losses performance to one side, DNOs that performed well

against the four key performance indicators across the entire DPCR4 period were

WPD S Wales, WPD S West and SSE Hydro. Each DNO achieved at least three green

scores. DNOs that did not perform as well were CN West, CE YEDL, UKPN LPN and

UKPN SEPN. Each DNO achieved at either three red scores and one amber score or

two red scores and at least two amber score. In DPCR4 DNOs struggled against their

CML targets.

2.22. The indicative return on regulated equity (RoRE) achieved by each DNO during

DPCR4 is set out in figure 2.1.7 The RoRE is a measure of the returns to shareholders

7 As set out in chapter 6 and 7, RoRE should be considered as indicative since the distribution losses incentive will not be finalised until 2012.



against the baseline cost of equity we set in DPCR4. To date, and bearing in mind

that we are still to close out the distribution losses incentive mechanism, DNO

shareholders appear to have earned between 5 and 10 per cent returns against a

baseline return of 7.5 per cent. Figure 2.1 also includes the percentage difference

between each DNO‟s actual total expenditure (totex) and the allowance provided in

DPCR4.8

2.23. DNOs that earned the highest shareholder returns did well against both the

performance incentive mechanisms and kept costs within the allowances we set. In

DPCR5 we sought to refine and improve this relationship between performance and

shareholder earnings. As such we anticipate a more distinct correlation between

performance against incentives and achieved RoRE in the DPCR5 period.

Figure 2.1 Indicative return on regulated equity (RoRE) and totex in DPCR4

8 Totex equals capital expenditure plus operating expenditure but excludes allowances for pensions and undergrounding in Areas of Outstanding Natural Beauty and National Parks.

-15.0%

-12.5%

-10.0%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

ENW

L

CN

Eas

t

SSE

Hyd

ro

UK

PN

LP

N

WP

D S

Wal

es

SSE

Sou

ther

n

UK

PN

EP

N

GB

ave

rage

CE

YED

L

CE

NED

L

WP

D S

Wes

t

UK

PN

SEP

N

SP D

istr

ibu

tio

n

CN

Wes

t

SP M

anw

ebDNO

Percentage of actual total expenditure compared to DPCR4 allowanceDPCR4 RORE achieved allowing for opex, capex, losses, QoS, volumes, tax, real interestDPCR4 RORE achieved allowing for opex, capexDPCR4 RORE allowed



Table 2.3 DNO performance snapshot for DPCR4

Performance indicator

A B C D E

CN West

CN East

ENWL

CE NEDL

CE YEDL

WPD S Wales

WPD S West

UKPN LPN

UKPN SEPN

UKPN EPN

SP Distribution

SP Manweb

SSE Hydro

SSE Southern




3. Network reliability

This chapter sets out key performance against the interruptions incentive scheme

targets. We outline customer interruptions and customer minutes lost performance

trends in Great Britain in 2009-10 and during the DPCR4 period. This chapter also

outlines the guaranteed standards.

3.1. Network reliability is one of the key priorities for network regulation. Customers

expect distribution network operators (DNOs) to minimise interruptions and to

restore supply as quickly as possible when they occur. We place financial incentives

on DNOs to deliver an appropriate level of service.

3.2. There are a number of metrics against which quality of service performance is

assessed. These metrics form the basis of the financial incentives to encourage DNOs

to deliver an appropriate level of service. DNOs receive a financial reward or penalty

commensurate with their performance in a number of areas.

3.3. Our quality of service reports previously set out network reliability performance.

The most recent publication set out performance in 2008-09. That report and

previous versions of it are available on our website.9 It is our intention that this

report shall supersede the quality of service report.

3.4. As such, this chapter sets out the two key performance metrics in the period

1 April 2009 to 31 March 2010 for the 14 DNOs. These key metrics include the

number of customer interruptions per year (CIs), and the duration of these

interruptions to supply per year known as customer minutes lost (CMLs).

3.5. We collect data and information about guaranteed standards of performance

from the DNOs. We in turn provide this to Consumer Focus who are responsible for

publishing performance against these standards. Consumer Focus‟ most recent

publication is for performance in 2008-09, which is available on their website.10 In

this chapter we have outlined what these standards are and what customers can do

to receive compensation under these standards.

3.6. We undertook an audit of the DNOs‟ interruptions incentive scheme performance

data for 2009-10. No data required adjusting and all DNOs met the required

accuracy thresholds. This was the ninth year of such audits. We have not audited any

other information provided by the DNOs.

Performance against interruptions targets in 2009-10

3.7. For DPCR4 we set targets for each DNO for the number of customers interrupted

per 100 customers and the number of customer minutes lost per customer on their

9 http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Pages/QoSIncent.aspx 10 http://www.consumerfocus.org.uk/topic/guaranteed-standards

http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Pages/QoSIncent.aspx

http://www.consumerfocus.org.uk/topic/guaranteed-standards



networks. Performance against these targets is linked to financial rewards and

penalties.

3.8. Figures 3.1 and 3.2 show the DNOs' 2009-10 performance relative to their

targets for the year. Targets are set taking into account DNOs' historical performance

and other network factors and they vary for each DNO. DNOs that outperformed

their targets are below the line and those that did not are above.

3.9. Figure 3.1 shows that in 2009-10 11 of the 14 DNOs outperformed their CI

targets and will receive a financial reward under the incentive scheme while the

remaining three DNOs incurred a financial penalty.

3.10. Figure 3.2 shows that seven DNOs beat their CML targets over the same period

and will receive a financial reward. The remaining seven DNOs incurred a financial

penalty.

Figure 3.1 CIs – 2009-10 performance relative to 2009-10 targets

0

20

40

60

80

100

120

140

160

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO

CIs as a % of target

Above line = performing worse, below = performing better than target



Figure 3.2 CMLs – 2009-10 performance relative to 2009-10 targets

3.11. In measuring DNOs' performance against the targets, Ofgem recognises that

some interruptions that arise on other networks (eg transmission networks) are

outside the DNOs control and are therefore excluded. However, a DNO can take

appropriate actions to mitigate the duration of these interruptions. Ten per cent of

the duration of interruptions on other networks is therefore included in assessing

performance against targets.

3.12. On the evidence of customer research carried out as part of the fourth price

control review, the weighting attached to planned/pre-arranged interruptions and

minutes lost was reduced from 100 per cent to 50 per cent as customers were less

inconvenienced when they had forewarning of an interruption.

3.13. DNOs may also claim an adjustment for events which they believe were

exceptional and had a significant impact on their performance. Ofgem will only make

such an adjustment if the event is found to be exceptional. In 2009-10 we recorded

16 severe weather exceptional events and two one-off exceptional events.

3.14. For severe weather exceptional events, Ofgem will exclude the full impact of

the event on customer interruptions and customer minutes lost. For one-off

exceptional events, only those customer interruptions and/or those customer

minutes lost exceeding the relevant CI and CML thresholds are eligible for exclusion.

The size of the adjustment(s) also depends on whether the DNO took all reasonable

steps to prevent the incident occurring and took all reasonable steps to restore

customers in an efficient and effective manner.

Performance trends in DPCR4

3.15. In DPCR4 a number of DNOs triggered a reopener provision regarding changes

to ESQCR requirements. In recognition of the impact of these new requirements on

0

20

40

60

80

100

120

140

160

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO

CMLs as a % of target

above line = performing worse, below = performing better than target



the DNOs‟ CIs and CML performance we adjusted the affected DNOs revenue

allowances. In our assessment we benchmarked the planned interruption

performance across companies relative to the cost of work being carried out and

have provided compensation based on the efficiently incurred additional

interruptions. The performance targets for the affected DNOs were not modified.

3.16. Figures 3.3 and 3.4 show the average performance for Great Britain‟s

distribution networks from April 2001 to March 2010. During that time, the

underlying average number of interruptions per 100 customers has fallen (improved)

by 20 per cent and the number of customer minutes lost has decreased (improved)

by 14 per cent. Both these figures show average performance with and without

storms.

3.17. Over the DPCR4 period average CIs were 10.7 per cent lower (better) than the

average target while average CMLs were 5.8 per cent lower (better) than the

average target.

Figure 3.3 Average CIs per 100 customers

Figure 3.4 Average CMLs per customer

0

20

40

60

80

100

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

With storms Without storms



3.18. The DNOs individual performance and commensurate rewards and penalties in

each of the previous years of DPCR4 are set out in our quality of service reports

published on our website and in the associated documents published with this

report.11

Guaranteed Standards of performance

3.19. DNOs are subject to a number of guaranteed standards of performance that set

out service levels that should be met. The standards cover a range of activities

including supply restoration, connections and voltage quality. DNOs' performance

against these standards can be a useful quality of service indicator. If the DNO fails

to meet the level of service required, it must make a payment to the affected

customer, subject to certain exemptions. The guaranteed standards applicable in

2009-10 are set out in table 3.1.12

As noted above in paragraph 3.5, Consumer Focus is responsible for publishing the

DNOs‟ performance against these standards.

11 www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Pages/QoSIncent.aspx 12 www.ofgem.gov.uk/Networks/ElecDist/QualofServ/GuarStandds/Pages/GuarStandds.aspx

http://www.legislation.gov.uk/uksi/2005/1019/contents/made

0

20

40

60

80

100

120

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

With storms Without storms


http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/GuarStandds/Pages/GuarStandds.aspx




Table 3.1 Guaranteed standards of performance

Code Service Performance Level Penalty Payment

GS1 Respond to failure of distributors fuse (Regulation 10)

All DNOs to respond within 3 hours on a working day (at least) 7 am to 7 pm, and within 4 hours on other days between (at least) 9 am to 5 pm, otherwise a payment must be made

£20 for domestic and non-domestic customers

GS2* Supply restoration: normal conditions (Regulation 5)

Supply must be restored within 18 hours, otherwise a payment must be made

£50 for domestic customers and £100 for non-domestic

customers, plus £25 for each further 12 hours

GS2A* Supply restoration: multiple

interruptions (Regulation 9)

If four or more interruptions each lasting 3 or more hours

occur in any single year (1 April – 31 March), a payment must be made

£50 for domestic and

non-domestic customers

GS3 Estimate of charges for connection (Regulation 11)

5 working days for simple work and 15 working days for significant work, otherwise a payment must be made


GS4* Notice of planned interruption

to supply (Regulation 12)

Customers must be given at least 2 days notice, otherwise a

payment must be made



GS5 Investigation of voltage

complaints (Regulation 13)

Visit customer‟s premises within 7 working days or dispatch

an explanation of the probable reason for the complaint within 5 working days, otherwise a payment must be made



GS8 Making and keeping appointments (Regulation 17)

Companies must offer and keep a timed appointment, or offer and keep a timed appointment where requested by the customer, otherwise a payment must be made


GS9 Payments owed under the standards (Regulation 19)

Payment to be made within 10 working days, otherwise a payment must be made


GS11A* Supply restoration: Category 1 severe weather conditions (Regulation 6)

Supplies must be restored within 24 hours, otherwise a payment must be made

£25 for domestic and non-domestic customers, plus £25 for each further 12 hours up

to a cap of £200 per customer

GS11B* Supply restoration: Category 2

severe weather conditions (Regulation 6)

Supplies must be restored within 48 hours, otherwise a


£25 for domestic and non

domestic customers, plus £25 for each further 12 hours up to a cap of £200 per customer

GS11C* Supply restoration: Category 3 severe weather conditions (Regulation 6)

Supplies must be restored within the period calculated using

the following formula:2

48customers of number threshold 3 category

dinterrupte customers of number total

£25 for domestic and non-domestic customers, plus £25 for each further 12 hours up to a

cap of £200 per customer

GS12* Supply restoration: Highlands

and Islands (Regulation 7)

Supply must be restored within 18 hours, otherwise a


£50 for domestic customers and

£100 for non-domestic customers, plus £25 for each further 12 hours

Note: Customers need to claim under these standards, for the remaining standards payments are automatic.



Transition to DPCR5 and RIIO-ED1


2010 to 31 March 2015 recently commenced. A worst served customer fund and

revised guaranteed standards of performance were introduced to improve network

reliability performance.

3.21. The worst served customer fund enables DNOs to log up the costs of carrying

out work to improve the reliability of supply for customers who currently receive a

poor quality of service. The scheme provides a framework for DNOs to invest in

improving their networks for the benefit of customers that are considered worst

served. The fund is intended to cover schemes that under the Interruption Incentive

Scheme would not go ahead, but in terms of delivering a real tangible difference for

customers do have merit. The fund provides up to £1,000 per affected customer to

be invested in improving their interruptions performance. The explicit details of the

scheme and the allowances provided to each DNO are set out in final proposals –

incentives and obligations.13

3.22. DPCR5 provided each DNO an allowance on a use-it-or-lose-it basis.

Expenditure is recovered ex-post by DNOs. To be eligible to recover expenditure

under this mechanism DNOs must demonstrate a 25 per cent reduction in the

average number of higher voltage interruptions for worst served customers

measured over three full reporting years post expenditure.

3.23. DNOs commence reporting their actual expenditure under the worst served

customer fund in 2013-14. Performance against this measure will then be

incorporated in future versions of this report.

3.24. Revised guaranteed standards commenced on 1 April 2010. The Electricity

(Standards of Performance) Regulations 2010 “Revised Standards SI” replace the

Electricity (Standards of Performance) Regulations 2005 set out in table 3.1.14 The

main changes were:

The creation of a new standard for incidents that interrupt 5,000 or more

premises (see regulation 6 of the Revised Standards SI)

The creation of a new standard where a rota disconnection policy is employed

to share out available load (see regulation 8 in the Revised Standards SI)

Greater clarity to the existing planned interruption standard, to make it

explicit when notice is required and under which situations it is not required

(see regulation 14 in the Revised Standards SI)

Updating all payment levels to reflect inflation over the period April 2005 to

November 2009 and to ensure that where a standard is capped, the cap

equates to an addition of the relevant payments

13 Electricity Distribution Price Control Review, Final Proposals - Incentives and Obligations, 7 December 2009, pp. 81-82. 14 http://www.legislation.gov.uk/uksi/2010/698/contents/made




Updating the thresholds for normal and severe weather conditions

Amendments to regulation 19 in the Revised Standards SI so that it does not

apply to a visit for a purpose that is the subject of the Connections Standards

SI when that statutory instrument comes into force.

3.25. To lodge a claim customers‟ need to contact their distributor within no later

than three months of supply being restored. Contact information for each DNO is set

out in appendix 2 of this report. If a claim for compensation is not received the

compensation due is shared between all the offending DNOs‟ customers.

3.26. We anticipate that Consumer Focus will continue to publish performance

against guaranteed standards in the future.




electricity distribution price control will be set using the RIIO model. In chapter 2 we

set out the RIIO model‟s six primary outputs categories. The network reliability

performance measures discussed in this chapter will form part of the reliability and

availability output category under the RIIO model.



4. Customer service

This chapter sets out performance trends in Great Britain in 2009-10 and during the

DPCR4 period on the quality and speed of telephone response measures and the

outcomes of the customer reward scheme.

4.1. Customer service is one of Ofgem's key priorities for network regulation.

Customers expect and their licences stipulate that distribution network operators

(DNOs) are readily contactable and engage with their stakeholders. We place

financial incentives on DNOs to deliver an appropriate level of service based on,

where possible, customers‟ willingness to pay.

4.2. There are a number of metrics against which customer service is assessed.

These metrics form the basis of the financial incentives to encourage DNOs to deliver

an appropriate level of service. DNOs receive a financial reward or penalty

commensurate with their performance.

4.3. Our quality of service report previously set out telephone performance. The

most recent publication was for performance in 2008-09. That report and previous

versions of it are available on our website.15 It is our intention that this report

supersedes the quality of service report. As such, this chapter sets out the telephone

performance metrics in the period 1 April 2009 to 31 March 2010 for the 14 DNOs.

These key metrics include the quality and speed of telephone response customers

and the customer reward scheme.

4.4. We have published an annual decision report for the electricity distribution

customer service reward scheme. We intend to continue to publish the DNOs‟ entries

and the independent panel‟s decisions. This information can be found on our

website.16

Telephone response performance

4.5. DPCR4 continued the application of two telephone performance measures; the

quality of response and the speed of response.

Quality of response

4.6. Each DNO is assessed on the quality of its telephone response through a

monthly customer satisfaction survey. DNOs may be rewarded or penalised

depending on their overall annual score. Performance in DPCR4 was assessed across

the five key areas listed below:

The politeness of the members of staff

15 http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Pages/QoSIncent.aspx 16 www.ofgem.gov.uk/Networks/ElecDist/QualofServ/CustServRewSch/Pages/CustServRewSch.aspx


http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/CustServRewSch/Pages/CustServRewSch.aspx



Their willingness to help

The accuracy of the information given (if information was given)

The usefulness of the information given (if information was given)

Satisfaction with the speed to telephone response

4.7. Customers are asked to score DNOs on a scale of 1 (very dissatisfied) to 5 (very

satisfied) based on their individual experiences of the telephone conversation they

had with the DNO during a power outage. An overall performance score is calculated

for each DNO.

4.8. DNOs are subject to a sliding-scale penalty if their annual mean performance

deteriorates below 4.1 (the minimum average performance level at the time of

revising the scheme). A DNO is liable for the full penalty of 0.25 per cent of revenue

if its annual mean score falls below 3.6. There is a small reward of 0.05 per cent of

revenue for those DNOs with annual mean scores equal to or greater than 4.5. This

provides DNOs an incentive to maintain a high level of telephone performance where

only exceptional performance is rewarded.

4.9. Table 4.1 and figure 4.1 show the mean scores for the period from 1 April 2009

until 31 March 2010 for each DNO for the five assessed attributes listed above. The

performance scores and rankings reported here are based on the mean annual

scores.

4.10. The overall assessed mean score for 12 months period was 4.46. WPD S Wales

recorded the highest score (4.71) followed by SSE Hydro (4.63) along with WPD S

West (4.62). SSE Hydro and WPD S Wales have been the highest scoring DNO areas

on telephone since 2004-05. Ten DNO areas recorded scores above the overall

mean for 2009-10 with scores for five DNO areas significantly higher. All DNOs

recorded overall mean scores above the penalty threshold.



Table 4.1 2009-10 Quality of telephone response overall performance scores

Rank 2009-10 (2008-09)

DNO 2009-10 Scores Rewards/Penalties

(£, 2007-08)

Ind. Mean 2005-06 4.35

Ind. Mean 2006-07 4.30

Ind. Mean 2007-08 4.33

Ind. Mean 2008-09 4.37

Ind. Mean 2009-10 4.46

1 (2) WPD S Wales 4.71 85,812

2 (1) SSE Hydro 4.63 101,908

3 (3) WPD S West 4.62 105,071

4 (6) CN East 4.56 144,182

5 (5) CE NEDL 4.56 089,761

6 (8) CN West 4.53 141,343

7 (4) ENWL 4.53 129,549

8 (9) CE YEDL 4.49 -

9 (7) SSE Southern 4.48 -

10 (10) SP Manweb 4.47 -

11 (11) SP Distribution 4.33 -

12 (12) UKPN EPN 4.22 -

13 (13) UKPN SEPN 4.18 -

14 (14) UKPN LPN 4.11 -

Speed of response

4.11. DNOs must also report their performance on the speed of telephone response

by an agent once a customer has decided to speak to an agent. There are no

financial incentives attached to this measure.

4.12. In 2009-10 CE YEDL, ENWL, UKPN LPN, UKPN SEPN and UKPN EPN reported

performance against hold systems. These DNOs have previously reported their

performance against redial systems. CN West and CN East are the only DNOs

remaining on redial systems. Table 4.2 sets out the average speed of response (in

seconds) for the period 1 April 2009 until 31 March 2010 for each DNO split by

telephone system.



Table 4.2 2009-10 average speed of telephone response (seconds)

Hold system Redial system

DNO Response time DNO Response time

ENWL 2.99 CN West 22.51

CE NEDL 14.00 CN East 20.29

CE YEDL 12.42 WPD S Wales 1.29 WPD S West 1.42 UKPN LPN 69.47 UKPN SEPN 72.28

UKPN EPN 60.12

SP Distribution 19.68 SP Manweb 17.64 SSE Hydro 22.58 SSE Southern 20.82

Average 26.23

21.40


4.13. Figure 4.1 shows that in general after a decline in 2006-07 the average quality

of telephone response in Great Britain improved in each subsequent year over the

course of the DPCR4 period.



Figure 4.1 2009-10 Quality of telephone response overall performance

scores

Note: no financial reward or penalty for performance above 4.1 (blue line) but below 4.5 (green line).

4.14. Figure 4.2 shows that in general after a decline in 2006-07 the average speed

of telephone response (both hold and redial systems) in Great Britain improved in

each subsequent year over the course of the DPCR4 period.

Figure 4.2 Average speed of telephone response (seconds)

4.15. The DNOs‟ individual performance and commensurate rewards and penalties in

each of the previous years of DPCR4 are set out in Ofgem‟s quality of service reports,

3.7

3.8

3.9

4.0

4.1

4.2

4.3

4.4

4.5

4.6

4.7

4.8

Ind

. Mea

n 0

5-0

6

Ind

. Mea

n 0

6-0

7

Ind

. Mea

n 0

7-0

8

Ind

. Mea

n 0

8-0

9

Ind

. Mea

n 0

9-1

0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

Pe

rfo

rman

ce s

core

s (o

ut

of

five

)

DNO

2009-10 quality of telephone response overall performance scores Quality of telephone response overall mean performance scoresabove line = performance that resulted in rewardbelow line = performance that resulted in penalty

20.0

25.0

30.0

35.0

40.0

45.0

2005-06 2006-07 2007-08 2008-09 2009-10

GB average speed of telephone response (seconds)



which can be found on our website and in the associated documents published with

this report.17

Customer Service Reward Scheme

4.16. The customer service reward scheme is a discretionary reward of £1 million per

year designed to reward the performance of those DNOs that best serve the interests

of their customers across the chosen categories throughout the year. The scheme is

designed to reward DNOs that exceed their licence requirements and demonstrate a

holistic approach to promoting best practice that is embedded in broader business

processes.

4.17. Each year DNOs are invited to submit entries to Ofgem detailing the initiatives

and strategies they consider have best served the interests of customers across the

chosen categories throughout the reward period. For the 2009-10 scheme the two

chosen categories were:18

wider communication strategies

corporate social responsibility initiatives

4.18. In 2009-10, all seven DNOs submitted entries for the scheme. The panel for

the 2009-10 scheme was chaired by Sarah Harrison, Senior Partner Sustainable

Development, Ofgem. The other five members of the panel were:

Audrey Gallacher, Head of Consumer Focus

Dr Gill Owen, Chair of the Public Utilities Access Forum

Derek Lickorish, Chair of the Fuel Poverty Advisory Group

Solitaire Townsend, Co-founder Futerra Sustainability Communications

Simon Roberts, Chief Executive, Centre for Sustainable Energy

4.19. A reward of £400,000 was originally available in the corporate and social

responsibility category. The panel was disappointed in the 2009-10 submissions and

reduced that amount to £200,000, of which only £100,000 was awarded.

CE received a reward of £100,000 for their air-source heat pumps initiative

developed in partnership with Community Energy Solutions (CES) and their

electric vehicle initiative. The heat pumps initiative aimed to cut fuel bills for

fuel poor customers and reduce carbon emissions whilst assessing ways of

reducing the impact of connecting heat pumps to the network.

17 www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Pages/QoSIncent.aspx 18 Priority customer care initiatives are the third category in the customer reward scheme. No reward was offered in this category in 2009-10.




4.20. A reward of £600,000 was originally available in the wider community

strategies category. The panel reduced this amount to £500,000 as the general

quality of the submissions was below the standard expected. In total £500,000 was

awarded.

WPD was awarded £175,000 in recognition of the wide breadth of their

communication strategy and the extent to which this was embedded into their

ongoing business practices. WPD are also to receive a flagship award of

£50,000 to recognise its partnership work with Energy Action Grants Agency

(Eaga) Cymru. The Eaga initiative was considered exemplary because it

simultaneously secured benefits for the fuel poor population in Wales and

promoted energy efficiency.

CN also received an award of £175,000 for its innovative deployment of

technology to reach their customers, using a wide variety of tools such as the

internet, live chats and text messaging to convey key messages.

SSE was awarded £100,000 in recognition of the proactive management of

their priority service customers initiative. SSE matched their database with

records held by local authorities helping to ensure that the information they

held was up to date.

Table 4.3 2009-10 customer service reward scheme

priority customer care initiatives

corporate and social

responsibility

wider community strategies

Central Networks - - 175,000

Electricity North West - - -

CE Electric - 100,000 -

Western Power Distribution - - 225,000

UK Power Networks - - -

Scottish Power - - -

Scottish & Southern Energy - - 100,000

Measure total - 100,000 500,000

GB total 600,000

Note: the 2009-10 customer service reward scheme did not include priority customer care initiatives.

4.21. Further information about the customer reward scheme for the previous years

of DPRC4 can be found on our website and the associated documents published with

this report.19

19 www.ofgem.gov.uk/Networks/ElecDist/QualofServ/CustServRewSch/Pages/CustServRewSch.aspx

http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/CustServRewSch/Pages/CustServRewSch.aspx





2010 to 31 March 2015 recently commenced. It was decided to introduce a broad

measure of customer satisfaction was introduced to capture the views of all types of

customers across a range of contact experiences.

4.23. The broad measure is a composite measure of three key elements: the

customer satisfaction survey, complaints and DNO stakeholder engagement. The

incentive aims to drive improvements in the quality of the overall customer

experience with DNOs across a range of service and activities performance.

customer satisfaction survey: focuses on planned and unplanned

interruptions, connections and general enquiries

complaints metric: focuses on unresolved and repeated complaints and

decisions made by the Energy Ombudsman

stakeholder engagement: focuses on stakeholder views on the DNOs‟

approach to engagement and outcomes from that engagement

4.24. The customer satisfaction survey element expands upon the scope of the

quality and speed of telephone response measures currently in place. DNOs

commence reporting their performance under the broad measure in 2012-13. As

such, the quality and speed of response measures will cease to apply from 1 April

2012. Performance against this measure will be incorporated in future versions of

this report.

4.25. The explicit details of the broad measure and the criteria and weightings

specific to each element of the scheme are set out in final proposals – incentives and

obligations.20





set out the RIIO model‟s six primary outputs categories. The customer service

performance measures discussed in this chapter will form part of the customer

satisfaction output category under the RIIO model.

20 Electricity Distribution Price Control Review, Final Proposals - Incentives and Obligations, 7 December 2009, 145/09, pp. 72-78.



5. Connections

This chapter summarises the level of competition in connections, the average and

maximum time to provide connection offers and investigations into connections

licence breaches in Great Britain in 2009-10.

5.1. The connections market is important to consumers who require a gas or

electricity supply. It is open to competition and a number of new players compete

with incumbent network companies to provide new connections. We use the

regulatory framework to protect customers and facilitate the continued development

of competition in this market.

5.2. We recently published the gas and electricity connections industry review report

(CIR) for 2009-10.21 This document sets out the emerging trends in Great Britain

and how licensed companies have complied with their connections related

obligations. The CIR provides an overview of how the connections industry works and

the level of competition in the market. It also sets out the DNOs‟ performance

against connections standards of service. The 2009-10 report and previous year‟s

reports are available on our website.22 We welcome views on whether we should

continue publishing the CIR in the future or whether to incorporate such information

into future versions of this report.

5.3. As set out in our open letter dated 17 December 2009, this chapter provides an

overview of the level of competition in the electricity connections market. It also

sets out the average and maximum time taken by DNOs‟ to provide connection offers

and provides an overview of investigations into related licence breaches.

Stakeholders interested in the connections market and DNOs performance against

connections standards of service should refer to the 2009-10 CIR.

Competition in Connections

5.4. In 2009-10 188,608 new and modified metered electricity connections were

undertaken by distribution network operators (DNOs), independent distribution

network operators (IDNOs) and independent connection providers (ICPs) in Great

Britain.23 This represents a 27 per cent decrease on the 259,558 connections

undertaken in 2008-09.

5.5. Table 5.1 shows that nine per cent of the connections in 2009-10 were made toy

IDNOs‟ networks, with 91 per cent of connections being made to DNOs‟ networks.

This compares to three and six per cent of connections being made to IDNOs‟

networks in 2007-08 and 2008-09.

21 Gas and Electricity Connections Industry Review 2009-10, 25 February 2011, 20/11. 22 http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Pages/ConnIndRev.aspx 23 A modified connection is an existing connection that has been changed. Modified connections include increases in capacity which may include contestable elements but also „service alterations‟ which are generally not contestable.

http://www.ofgem.gov.uk/Networks/Connectns/ConnIndRev/Pages/ConnIndRev.aspx



5.6. Overall, market penetration of third parties (IDNOs and ICPs) in the electricity

connections market has risen to 12.6 per cent in 2009-10, compared to 9.9 per cent

in 2008-09 and 7.2 per cent in 2007-08.24

5.7. Using the data in table 5.1, figure 5.1 also shows that during the DPCR4 period a

progressively higher percentage of new and modified metered connections were to

IDNO networks. It also shows that the market penetration of new entrants (IDNOs

and third party connection providers - ICPs) has progressively increased.

Table 5.1 Total number of new and modified metered electricity connections

Connections by:

DNO 05-06

IDNO 05-06

DNO 06-07

IDNO 06-07

DNO 07-08

IDNO 07-08

DNO 08-09

IDNO 08-09

DNO 09-10

IDNO 09-10

Licensee 281473 0 280402 527 294161 308 222693 0 159877 1350

(87%) (0%) (87%) (0%) (87%) (0%) (85% (0%) (85%) (1%)

Companies affiliated to the licensee

27989 1588 22475 4082 19727 3961 11143 12133 4955 15284

(9%) (0%) (7%) (1%) (6%) (1%) (4% (5%) (3%) (8%)

Third Parties 13430 54 13035 563 14108 5979 12911 678 6025 1117

(4%) (0%) (4%) (0%) (4% (2%) (5% (0%) (3%) (1%)

Total 322892 1642 315912 5172 327996 11585 246747 14585 170857 17751

(99%) (1%) (98%) (2%) (97% (3%) (94%) (6%) (91%) (9%)

Industry total 324534 321084 338244 259558 188608

Note: percentages may not add due to rounding.

Figure 5.1 DPCR4 trends in Great Britain in the provision of new and

modified metered electricity connections

5.8. It is worth noting however that competition in electricity connections remains

notably lower than that in the gas connections market. We continue to implement

measures to address this issue, some of which are detailed under the heading

Transition to DPCR5 and RIIO-ED1 in this chapter.

24 The 2009-10 IDNO totals include 1,321 out-of-area connections by Scottish & Southern Energy.

70%

75%

80%

85%

90%

95%

100%

0%

5%

10%

15%

20%

25%

30%

2005-06 2006-07 2007-08 2008-09 2009-10

Percentage of new and modified connections completed by IDNOs and third parties (LHS)

Percentage of new and modified connections to IDNO networks (LHS)

Percentage of new and modified connections completed to DNO networks (RHS)



Provision of quotations

5.9. SLC 12 obligates each DNO to provide offers for connection as soon as

reasonably practicable, and in any event within three months of the receipt of an

application. This is provided that the application contains all such information as may

reasonably be required by the DNO for the purpose of formulating an offer.

5.10. Table 5.2 sets out the average and maximum time taken by DNOs to provide

connection offers in 2009-10. Cells highlighted green indicate an average or

maximum of less than 90 days, white indicates an average or maximum number of

days between 90 and 92 days and red indicate an average or maximum of greater

than 92 days.

Table 5.2 Average and maximum timescales within which Licensees have

provided SLC 12 connection offers in 2009-1025

LV HV EHV DG

DNO Average number of days

Max number of days

Average number of days

Max number of days


Max number of days


Max number of days

CN West 16 100 41 104 0 0 27 86

CN East 15 108 46 127 78 78 31 109

ENWL 14 135 32 90 54 85 44 90

CE NEDL 11 89 38 88 40 90 42 90

CE YEDL 8 87 25 87 47 90 33 87

WPD S Wales 3 17 14 89 51 59 38 89

WPD S West 4 18 53 90 35 35 73 94

UKPN LPN 12 91 24 91 45 90 45 73

UKPN SEPN 17 90 32 89 51 91 47 91

UKPN EPN 11 90 23 89 35 91 64 91

SP Distribution 14 60 32 60 0 0 40 85

SP Manweb 11 15 50 90 89 91 89 92

SSE Hydro 4 391 32 160 0 0 78 152

SSE Southern 3 90 34 90 90 90 90 90

5.11. Ofgem may investigate and fine DNOs that fail to provide timely connection

offers in accordance with the requirements of SLC 12. In 2009-10 we investigated

each licence breach and issued fines to CN West, CN East, ENWL and SSE Hydro

totalling £1 million (CN West £200,000, CN East £200,000, ENWL £100,000 and SSE

25 In 2009-10 there was some misalignment between the new guaranteed standards for new connections and distributed generation and SLC 12. SLC 12 specifies a three month time period within which connection offers should be provided. The guaranteed standards specify it as being 65 working days. There can be three month periods which, due to bank holidays, can include less than 65 working days. In these circumstances a potential breach of SLC 12 may not result in a failure to meet the guaranteed standard. Again what may be considered a breach in one is not in another. As systems are updated to accommodate the guaranteed standards these issues are likely to become more evident. This was the case with WPD S West‟s maximum number of days for distributed generation connections.



Hydro £500,000.26 Further information about each investigation is also set out in the

gas and electricity connections industry review report for 2009-10.

5.12. We note that each of the DNOs co-operated with our investigation and

accepted our findings. This is reflected in the level of the penalties, which otherwise

would have been higher.



2010 to 31 March 2015 recently commenced. Following the publication of DPCR5 we

developed and introduced new guaranteed standards for connections and distributed

generation customers. The Electricity (Connection Standards of Performance)

Regulations 2010 took effect from 1 October 2010.

5.14. We introduced these standards because the general level of service provided

by DNOs to connections customers has been poor. The DNOs and other interested

parties were extensively involved in the development of the new standards. DNOs

must now pay customers penalty payments if DNOs fail to meet the specified

standards. Further information on the standards can be found in our SLC 15A

Guidance Document.27

5.15. DNOs report their performance under the connections guaranteed standards to

Ofgem on a quarterly basis. We intend to publish performance against these

standards in the future.





set out the RIIO model‟s six primary outputs categories. The connections

performance measures discussed in this chapter will form part of the connection

terms output category under the RIIO model.

26 http://www.ofgem.gov.uk/Media/PressRel/Documents1/Connections%20Press%20Release%20Feb%202011.pdf 27 http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=55&refer=Networks/ElecDist/QualofServ/GuarStandds

http://www.ofgem.gov.uk/Media/PressRel/Documents1/Connections%20Press%20Release%20Feb%202011.pdf

http://www.ofgem.gov.uk/Media/PressRel/Documents1/Connections%20Press%20Release%20Feb%202011.pdf

http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=55&refer=Networks/ElecDist/QualofServ/GuarStandds

http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=55&refer=Networks/ElecDist/QualofServ/GuarStandds



6. Environment

This chapter sets out performance against the network losses incentive and

undergrounding undertaken in Areas of Outstanding Natural Beauty (AONB) and

National Parks in 2009-10 and during the DPCR4 period.

6.1. In DPCR4 we placed a number of incentives on DNOs that relate to the

environment. These include the network losses incentive, distributed generation

obligations and incentive and an allowance for undergrounding in AONBs and

National Parks.

6.2. We have previously published a factsheet summarising electricity distribution

units that enter distribution networks and losses expressed as a percentage of the

units entering distribution networks. These factsheets can be found on our website.28

We intend to continue to periodically update and publish this factsheet.

6.3. Our quality of service report previously set out undergrounding undertaken by

DNOs in AONB and National Parks. The most recent publication was for performance

in 2008-09. That report and previous versions of it are available on our website.29 It

is our intention that this report supersedes the quality of service report. As such, this

chapter sets out undergrounding in AONBs and National Parks in the period 1 April

2009 to 31 March 2010 for the 14 DNOs.

6.4. In our open letter dated 17 December 2009 we proposed the composition of the

electricity distribution annual report. In response to our consultation a number of

stakeholders stated they would find the undergrounding undertaken by DNOs in

AONBs and National Parks useful. As such, this chapter sets out DNOs performance

against the network losses incentive and the undergrounding undertaken in AONBs

and National Parks.

Network Loss Incentive

6.5. Distribution losses are the difference between the estimated volume of electricity

entering and exiting the system.

6.6. In DPCR4 we established a network loss incentive. The losses targets for each

DNO were fixed for each year of the DPCR4 period. An incentive rate of £48 per MWh

(£2004-05) (£53 per MWh in £2007-08) was applied for the duration of the period.

DNOs kept the benefit and penalties of performance against the losses target for five

years through the application of a rolling retention mechanism. The network loss

28 http://www.ofgem.gov.uk/Networks/ElecDist/Documents1/Distribution%20Units%20and%20Loss%20Percentages%20Summary.pdf 29 http://www.ofgem.gov.uk/Networks/ElecDist/QualofServ/QoSIncent/Pages/QoSIncent.aspx

http://www.ofgem.gov.uk/Networks/ElecDist/Documents1/Distribution%20Units%20and%20Loss%20Percentages%20Summary.pdf

http://www.ofgem.gov.uk/Networks/ElecDist/Documents1/Distribution%20Units%20and%20Loss%20Percentages%20Summary.pdf




incentive is set out in more detail in the DPCR4 final proposals.30 Figure 6.1 shows

the DNOs performance against the targets in 2009-10.

Figure 6.1 DNO network losses performance in 2009-10

30 Electricity Distribution Price Control Review, Final Proposals, November 2004, 265/04, pp. 21-44.

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

GB

ave

rage

DNO

DNO performance in 2009-10 DNO average target losses




6.7. Table 6.1 shows that while distribution losses fluctuated between years in the

DPCR4 period the majority of DNO‟s performance was better (lower) than the DPCR4

target loss percentage.

Table 6.1 DNO network losses performance in DPCR4

Target loss percentage 2005-06 2006-07 2007-08 2008-09 2009-10

Average distribution

loss percentage (DPCR4)

CN West 4.96% 4.96% 3.95% 4.51% 5.43% 5.52% 4.86%

CN East 5.69% 4.94% 5.14% 4.11% 3.98% 4.64% 4.56%

ENWL 5.56% 4.65% 4.72% 5.06% 5.10% 6.93% 5.27%

CE NEDL 5.20% 4.77% 4.53% 5.27% 4.93% 6.69% 5.21%

CE YEDL 5.90% 3.60% 3.82% 5.86% 5.24% 7.57% 5.16%

WPD S Wales 4.94% 4.97% 5.29% 5.34% 4.55% 5.30% 5.09%

WPD S West 6.96% 5.68% 5.73% 6.73% 6.57% 6.65% 6.26%

UKPN LPN 6.54% 5.55% 5.31% 5.83% 5.81% 5.52% 5.61%

UKPN SEPN 6.54% 5.88% 5.58% 5.91% 5.96% 5.16% 5.70%

UKPN EPN 6.32% 4.59% 4.44% 3.80% 5.26% 6.36% 4.87%

SP Distribution 5.19% 6.03% 6.20% 5.57% 6.67% 6.15% 6.12%

SP Manweb 5.43% 6.20% 5.81% 7.01% 6.62% 6.37% 6.40%

SSE Hydro 8.73% 8.66% 8.65% 8.66% 8.36% 8.30% 8.53%

SSE Southern 6.68% 6.54% 6.56% 6.55% 6.45% 6.23% 6.47%

GB average 6.05% 5.54% 5.52% 5.82% 5.81% 6.30% 5.55%

Note: average distribution loss percentage equals total losses in DPCR4 as a percentage of total energy exiting the distribution system in DPCR4.

6.8. Caution should be exercised in using the data in this table for comparative

purposes (either between DNOs or across time periods). Factors which could affect

comparison include:

The varying physical characteristics of different geographical networks which

have in many cases developed over a number of decades, including pre-

privatisation 'legacy issues'.

The fact that licensees can use different methodologies to establish the

number of units distributed for a given regulatory year.

The nature of settlement data giving the number of units distributed for a

given period. Settlement data exists primarily for customer billing purposes

and, at any given time, can include estimated data in respect of meters for

which up to date readings are unavailable.

The yearly reporting regime, together with the nature of settlement data

flows, mean that the reported unit totals in this table for a given regulatory

year may not conform exactly to what those totals would have been, had



they been ascertained after the end of the respective 14 month settlement

periods. It should also be noted that post-final settlement runs can take

place after the normal 14 month settlement period. The unit totals in

regulatory returns are only restated when absolutely necessary.

6.9. Some DNOs have indicated specific concerns with 2009-10 data affecting the

losses incentive. We are currently examining this issue. It is highly likely to result in

some restatement of losses.

6.10. We will finalise the DPCR4 losses incentive during 2012. During that process we

will finalise the settlement data, producing a final set of losses data which will then

be used to calculate financial rewards and penalties for that performance. As such,

the losses set out in table 6.1 should be regarded as indicative.

Undergrounding in Areas of Outstanding Natural Beauty and National Parks

6.11. In DPCR4 we provided each DNO an allowance to underground up to 1.5 per

cent of each DNOs network that falls within in AONB and National Parks. Each

allowance was based on the voltage level where £350k per km was allowed for EHV

and 132k lines, £85k per km for HV lines and £65k per km for LV lines.31

6.12. Table 6.2 sets out each DNOs allowance for 2009-10 and DPCR4 (£2007-08),

their actual spend in 2009-10 (£2007-08) and the percentage of their 2009-10

allowance.

Table 6.2 AONB and National Parks capital allowances in 2009-10

Max capex (£m 2007-08)

Capex spent (£m 2007-08)

Percentage of allowance spent

CN West 1.5 0.6 39.2%

CN East 0.5 0.3 61.7%

ENWL 1.2 1.2 104.1%

CE NEDL 1.3 0.8 59.8%

CE YEDL 0.3 0.1 37.4%

WPD S Wales 1.2 0.0 0.0%

WPD S West 3.2 0.0 0.0%

UKPN LPN - - -

UKPN SEPN 1.8 2.9 159.3%

UKPN EPN 0.7 0.7 105.3%

SP Distribution 0.2 0.0 0.0%

SP Manweb 1.3 0.6 51.1%

SSE Hydro 1.1 1.4 122.5%

SSE Southern 1.0 0.0 0.0%

GB total 15.0 8.6 56.9%

Note: in the DPCR4 period UKPN LPN was not provided an AONB allowance.

31 Electricity Distribution Price Control Review, Final Proposals, November 2004, 265/04, pp. 34-36.




6.13. DNOs had the discretion to spend their DPCR4 allowance at any point in time

during the period and on whatever projects they considered appropriate. In

figure 6.2 the blue column shows the amount of each DNO‟s DPCR4 AONB allowance,

the red column shows the amount of those allowances each DNO spent and the blue

line represents the overall percentage spent of each allowance by each DNO. This

information is also available in the associated documents published with this report.

6.14. The total AONB allowance provided in Great Britain in the DPCR4 period was

75.2 million (£2007-08) of which £23 million (£2007-08), which is equivalent to

31.0 per cent, was spent during the period.

Figure 6.2 AONB and National Parks capital allowances and expenditure in

DPCR4 (£2007-08)

Note: in DPCR4 UKPN LPN was not provided an AONB allowance.



2010 to 31 March 2015 recently commenced. In DPCR5 we retained the application

of the network losses incentive (although some revisions were made to the actual

mechanism) and the distributed generation obligations and incentive, and provided

allowances for undergrounding in AONBs and National Parks. In addition to these

measures two new initiatives were introduced:

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

£-

£2.0

£4.0

£6.0

£8.0

£10.0

£12.0

£14.0

£16.0

£18.0

£20.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO

DPCR4 AONB allowance spent DPCR4 AONB allowance

Percentage of DPCR4 AONB allowance spent



Low carbon network fund

Business carbon footprint

6.16. We put in place arrangements for a £500m fund to encourage the DNOs to

innovate to deliver the networks that users will need in a low carbon economy. The

low carbon networks fund (LCNF) will allow the DNOs to bid for cash from the fund to

trial new technologies, systems and commercial and network operating

arrangements. Without this incentive there is a risk that the DNOs will inhibit the

take up of low carbon initiatives such as electric vehicles. A condition of participating

in this initiative is that DNOs must share learning to maximise industry benefits.

6.17. The LCNF consists of two tiers. First tier is for small scale projects where

funding is directly provided to DNOs for specific projects. Second tier is for significant

projects where DNOs will have to bid for an allocation of the fund. A proportion of the

fund amount will also be available via discretionary awards to both Tier 2 projects

that successfully deliver against a set of pre-agreed criteria and to Tier 1 and Tier 2

projects that bring particularly valuable learning to the industry.

6.18. In the 2010-11 electricity distribution annual report we will provide a

description of the amount spent each year on ongoing and completed Tier 1 projects

and ongoing Tier 2 projects.

6.19. Under the business carbon footprint, DNOs are required to report their CO2

equivalent emissions each year. In the 2011-12 electricity distribution annual report

we propose to start publishing an annual league table of emissions. Over time,

stakeholders will gain a picture of which DNOs are doing the most to reduce their

emissions.

6.20. In October 2010 Ofgem introduced a new framework for network regulation.




set out the RIIO model‟s six primary outputs categories. The environmental

performance measures discussed in this chapter will form part of the environmental

impact output category under the RIIO model.



7. Network Investment and Expenditure

This chapter summarises the DNOs reported network investment (capital expenditure

(capex)) and operating expenditure (opex) compared to the DPCR4 allowances in

2008-09, 2009-10 and during the period. This chapter also outlines the indicative

return on regulated equity (RoRE) achieved during the period, actual pensions costs

and the regulatory asset value (RAV) at the end of DPCR4.

7.1. In DPCR4 we set each DNO a capex and opex allowance for each year of the

period. Each allowance included pension costs. Additionally we determined the RoRE

that each DNO could earn during the period.

7.2. Our electricity distribution cost review report previously set out network

investment. The most recent publication was for performance in 2007-08. That

report and previous versions of it are available on our website.32 It is our intention

that this report supersedes the electricity distribution cost review report.

7.3. As such, the key efficiency measures set out in this chapter include the reported

capex and opex in 2008-09 and 2009-10 compared to allowances, actual pension

costs in 2008-09 and 2009-10 and the closing RAV for each DNO at the end of

DPCR4 and the RoRE achieved by each DNO during DPCR4.

7.4. It should be noted that capex underspends are shared with consumers through

the capex rolling incentive mechanism while opex overspends present an additional

expense for DNOs‟ shareholders.33

7.5. Further, the below comparisons of capex and opex allowances to actual spends

exclude all pension costs but include ESQCR. The information presented in the below

figures is also available in the associated documents published with this report.

Reported expenditure in 2008-09 against DPCR4 allowances

7.6. Figures 7.1 and 7.2 set out the capex and opex for 2008-09 compared to the

DPCR4 allowance. In total, DNOs overspent against the capex allowance by

£75.8 million (equivalent to 4.9 per cent) and overspent against the opex allowance

by £114.4 million (equivalent to 16.4 per cent).34

32 http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/CostRep/Pages/CostRep.aspx 33 Electricity Distribution Price Control Review, Final Proposals, November 2004, 265/04, pp. 83-89. 34 Capital expenditure and operating expenditure values exclude allowances for pensions and undergrounding in Areas of Outstanding Natural Beauty and National Parks.

http://www.ofgem.gov.uk/Networks/ElecDist/PriceCntrls/CostRep/Pages/CostRep.aspx



Figure 7.1 capital expenditure in 2008-09 (£2007-08)

Figure 7.2 operating expenditure in 2008-09 (£2007-08)

Reported expenditure in 2009-10 against DPCR4 allowances

7.7. Figures 7.3 and 7.4 set out the capex and opex for 2009-10 compared to the

DPCR4 allowance. In total, DNOs overspent against the capex allowance by

-30%

-24%

-18%

-12%

-6%

0%

6%

12%

18%

24%

30%

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO

Difference in 2008-09 Percentage difference in 2008-09

-30%-20%-10%0%10%20%30%40%50%60%70%80%

-15.0-10.0

-5.00.05.0

10.015.020.025.030.035.040.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO




£17.8 million equivalent to 1.1 per cent and overspent against the opex allowance by

£91.8 million equivalent to 13.0 per cent.35

Figure 7.3 capital expenditure in 2009-10 (£2007-08)

Figure 7.4 operating expenditure in 2009-10 (£2007-08)

35 Capital expenditure and operating expenditure values exclude allowances for pensions and undergrounding in Areas of Outstanding Natural Beauty and National Parks.

-30.0%

-24.0%

-18.0%

-12.0%

-6.0%

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO


-30%-20%-10%0%10%20%30%40%50%60%70%80%

-15.0-10.0

-5.00.05.0

10.015.020.025.030.035.040.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO




Cumulative outturn expenditure DPCR4 (2005-06 to 2009-10)

7.6. Figures 7.5 and 7.6 set out the capex and opex for DPCR4 compared to the

DPCR4 allowance. In total, DNOs underspent against the DPCR4 capex allowance by

£514.4 million equivalent to 6.7 per cent and overspent against the DPCR4 opex

allowance by £321.8 million equivalent to 9.1 per cent.

Figure 7.5 capital expenditure in DPCR4 (£2007-08)

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

-125.0

-100.0

-75.0

-50.0

-25.0

0.0

25.0

50.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO

Difference in DPCR4 Percentage difference in DPCR4



Figure 7.6 operating expenditure in DPCR4 (£2007-08)

Return on Regulatory Equity

7.8. As outlined in the DPCR5 Final Proposals we have developed a measure of the

RoRE and have been monitoring DNO performance during the DPCR4 period. This

shows that, in practice, DNO returns have varied significantly from the DPCR4

assumed return on equity, with the majority of DNOs earning in excess of the

assumed return, some substantially. As well as each DNO's performance in

controlling costs, outturn RoRE has been driven by performance under the losses

incentive, the interruptions incentive scheme (IIS), the volume driver, changes in

corporate tax rate and deviations in real interest rates from those assumed when we

set the price control. It should be noted that performance under the losses incentive

has not yet been finalised.

7.9. The RoRE achieved in DPCR4 is set out in Figure 7.7. These returns do not

reflect any additional returns DNOs may have earned from gearing at levels in excess

of that assumed in the DPCR4 weighted average cost of capital (WACC) or any extra

return achieved via distributed generation use of system charging in DPCR4,

excluded services, legacy meter asset provision, out of area networks or de minimis

business.

7.10. We note that the RoRE presented in figure 7.7 are indicative only. As set out in

chapter 6, the distribution losses incentive will not be finalised until 2012. The

finalisation of the distribution losses incentive will affect the final RoRE achieved.

-12.0%

-6.0%

0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

36.0%

-50.0

-25.0

0.0

25.0

50.0

75.0

100.0

125.0

150.0

CN

Wes

t

CN

Eas

t

ENW

L

CE

NED

L

CE

YED

L

WP

D S

Wal

es

WP

D S

Wes

t

UK

PN

LP

N

UK

PN

SEP

N

UK

PN

EP

N

SP D

istr

ibu

tio

n

SP M

anw

eb

SSE

Hyd

ro

SSE

Sou

ther

n

DNO

Difference in DPCR4 Percentage difference in DPCR4



Figure 7.7 Indicative RoRE achieved during DPCR4 compared allowance

Pensions

7.11. We consulted extensively during 2008 and 2009 on our approach to the

funding of pensions. In the decision document36 of June last year we indicated that

pension costs would be subject to an efficiency test. The results shown below are,

therefore, provisional, dependent on the outcome of the pension efficiency review

(across all energy network operators) which will determine the established deficits

which we have committed to fund as at 31 March 2010 over the following 15 years.

Any adjustments required will be made at the next price control review.

7.12. Subject to the above we have compared DNOs actual costs in DPCR4 to the

allowances and updated the pension true up adjustments for the period. Table 7.1

below summarises the adjustments required in addition to those detailed in table 5.2

of the Final Proposals37 finance document (and which were incorporated in the

DPCR5 allowed revenues):

36 Price Control Treatment of Network Operator Pension Costs Under Regulatory Principles, June 2010, 76/10 37 Electricity Distribution Price Control Review Final Proposals - Allowed Revenues and Financial Issues document, 147/09

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

ENW

L

CN

Eas

t

SSE

Hyd

ro

UK

PN

LP

N

WP

D S

Wal

es

SSE

Sou

ther

n

UK

PN

EP

N

GB

ave

rage

CE

YED

L

CE

NED

L

WP

D S

Wes

t

UK

PN

SEP

N

SP D

istr

ibu

tio

n

CN

Wes

t

SP M

anw

eb

DNO

DPCR4 RORE achieved allowing for opex, capex, losses, QoS, volumes, tax, real interest

DPCR4 RORE achieved allowing for opex, capex

DPCR4 RORE allowed



Table 7.1 Additional Pension true up adjustments required

Regulatory Asset Value

7.13. In the Final Proposals finance document, table 3.1 detailed the movements in

RAV for DPCR4 with a forecast to 31 March 2010. An updated table is shown

table 7.2 and this shows the revised movements in DPCR4 together with the DPCR5

opening balance in 2009-10 (year average) prices. Prices are inflated using financial

year (April- March) average retail price index (RPI) factors.

7.14. Included in the revised movements are the pension true up variances as shown

in table 7.2. These numbers remain provisional pending completion of the pension

efficiency review currently being undertaken. Any adjustments required to true up

the final position will be made on a net present value (NPV) neutral basis at the next

price control.

Variance to Final Proposals

Cash

Additions in

closing RAV

£m (2007/08)

CN West 0.1 0.5

CN East (0.2) (0.7)

ENWL (0.4) (0.5)

CE NEDL 0.0 0.1

CE YEDL 0.0 (0.0)

WPD S Wales 0.0 (0.4)

WPD S West 0.2 0.2

UKPN LPN 0.0 1.1

UKPN SEPN (0.9) (2.1)

UKPN EPN 0.0 0.2

SP Distribution (0.3) (1.4)

SP Manweb (0.8) (1.1)

SSE Hydro (0.8) (4.7)

SSE Southern 0.1 0.9

(2.9) (7.9)



Table 7.2 RAV changes in DPCR4

7.15. The changes in the RAV from that forecast in the Final Proposals relate mainly

to the difference in the 2009-10 forecasts to actual outturn. These differences are

shown in table 7.3.

2009-10

prices (Year

average)

£m 2007-08

prices

Opening

RAV at 1

April 2005 Additions Depreciation

Closing

RAV 31

March

2010

Opening

RAV 1 April

2010

CN West 1,124.4 750.3 (486.1) 1,388.6 1,436.4

CN East 1,111.2 702.7 (486.6) 1,327.2 1,372.9

ENWL 1,078.7 582.3 (461.4) 1,199.6 1,240.9

CE NEDL 694.9 427.3 (300.2) 822.1 850.3

CE YEDL 941.6 520.1 (398.3) 1,063.4 1,100.0

WPD S Wales 676.1 289.6 (296.9) 668.8 691.8

WPD S West 831.5 431.1 (348.3) 914.3 945.8

UKPN LPN 1,037.2 581.7 (443.5) 1,175.3 1,215.7

UKPN SEPN 719.5 619.0 (318.8) 1,019.7 1,054.8

UKPN EPN 1,280.0 921.8 (538.8) 1,663.0 1,720.2

SP Distribution 1,473.9 465.5 (669.0) 1,270.4 1,314.1

SP Manweb 869.7 573.0 (373.1) 1,069.6 1,106.4

SSE Hydro 856.3 286.3 (310.4) 832.3 861.0

SSE Southern 1,574.2 728.6 (653.5) 1,649.3 1,706.0

Total 14,269.1 7,879.4 (6,084.8) 16,063.7 16,616.3



Table 7.3 Differences in RAV to Final Proposals document



2010 to 31 March 2015 recently commenced. In DPCR5 we sought to refine the

DNOs output measures as there appeared to be no discernable correlation between

outputs delivered and achieved RoRE.

7.17. We will investigate whether it is possible to provide high level information on

DNO output measures and how the company is performing against the output

measures they have agreed to in future versions of this report. If it is possible we

will make this information available to show how the DNO‟s are improving over time.

We also consider it will take a couple of years of DPCR5 before information that

allows for comparisons of this type will become available. Therefore we propose

reporting on this from 2012-13.

7.18. In October 2010 Ofgem introduced a new framework for network regulation.




set out the RIIO model‟s six primary outputs categories. The network investment and

expenditure efficiency measures discussed in this chapter are not primary output

categories under the RIIO model. However, they underpin the DNOs ability to

perform against all output categories.

Current

view

Final

Proposals

£m 2007-08

prices

Opening

RAV 1 April

2010

Opening

RAV 1 April

2010

Change from

FP

CN West 1,388.6 1,380.0 8.6

CN East 1,327.2 1,338.0 (10.8)

ENWL 1,199.6 1,211.9 (12.3)

CE NEDL 822.1 826.8 (4.7)

CE YEDL 1,063.4 1,056.9 6.5

WPD S Wales 668.8 668.9 (0.0)

WPD S West 914.3 914.3 (0.0)

UKPN LPN 1,175.3 1,202.7 (27.4)

UKPN SEPN 1,019.7 1,007.5 12.2

UKPN EPN 1,663.0 1,659.4 3.5

SP Distribution 1,270.4 1,283.3 (12.9)

SP Manweb 1,069.6 1,081.9 (12.3)

SSE Hydro 832.3 837.9 (5.6)

SSE Southern 1,649.3 1,653.5 (4.2)

Total 16,063.7 16,123.0 (59.3)



8. Next steps – DPCR5 and RIIO-ED1

Lessons learned from 2008-09 and 2009-10 process

8.1. This is the first report that brings together and summarises key indicators of the

electricity Distribution Network Operators (DNOs) performance. The process adopted

for this first annual reporting has generally worked well. It was based on the

processes established and specified in the electricity distribution price control period

1 April 2005 to 31 March 2010 (DPCR4). More specifically, the type and format of the

DNOs information is as specified in the Electricity Distribution Price Control Revenue

Reporting: Regulatory Instructions and Guidance (RIGs) (version 1).38

8.2. The broad approach does not, therefore, require fundamental change. However,

we note that future versions of this report will present the DNOs performance in the

fifth electricity distribution price control (DPCR5) in the period 1 April 2010 to

31 March 2015.

Future Work Programme

8.3. As with DPCR4 the information we require from the DNOs is set out in RIGs. As

part of DPCR5 we undertook a review of the information that DNOs provide in order

that we can monitor performance against their price control obligations and to inform

future price controls. DPCR5 introduced a number of new measures of performance.

As a result of our final proposals for DPCR5 it was clear that we would need to collect

new types of data from the DNOs.

8.4. To ensure that there is no duplication or gaps in the information that we are

requiring we set up three working groups with the DNOs to assist us in developing

the three RIGs. This engagement has been positive and constructive and we'd like to

thank all those involved.

8.5. On 26 May 2010 we issued version 1 of the DPCR5 RIGs (ref. 66/10), which

provide the framework enabling us to collect data from the DNOs to monitor

compliance and assess their performance throughout the DPCR5 period and to inform

future price controls.

8.6. Table 8.1 sets out these new performance measures introduced in the DPCR5

period and the first electricity distribution annual report they will be reported in.

38 http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=489&refer=Networks/ElecDist/PriceCntrls/DPCR5

http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=489&refer=Networks/ElecDist/PriceCntrls/DPCR5

http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=489&refer=Networks/ElecDist/PriceCntrls/DPCR5



Table 8.1 new performance measures introduced in DPCR5

Measure Information to be published Year

Customer Service

Worst served customers DNOs spend on worst served customers

relative to DPCR5 allowance, shows where

DNOs have focused on improving service

2013-14

Broad measure DNOs performance customer service score

across a broad measure of services

2013-14

Connections

Provision of connection

offers

DNOs average and maximum time taken

to provide connection offers

2010-11

Guaranteed Standards DNOs performance against the new

connections guaranteed standards

2010-11

Environment

Low carbon network fund Summarises DNO initiatives and spending

on innovative solutions to reduce carbon

2010-11

Business carbon footprint Total CO2 equivalent emissions by DNO 2010-11

Network investment and

expenditure

Network outputs Provides information about the quality of

the network, what customers are getting

for their money

2012-13

8.7. We intend to continue publishing this report in the future. In doing so we

consider it important to seek to improve the content and presentation of this

information. In developing this report for 2010-11 we will consider publishing

information in a web-based interactive format instead of a traditional report if

stakeholders would find it more useful and convenient. This would allow stakeholders

to find information that is of particular interest to them. To that end, we welcome

feedback and comments on the content and format of this report.


Put your title here document date

Appendices

Appendices

Index

Appendix Name of Appendix Page Number

1 Responses and Questions 53

2 Distribution Network Operator contact information 54

3 The Authority‟s Power and Duties 55

4 Glossary 58

5 Feedback questionnaire 63



Appendices

Appendix 1 - Responses and Questions

We welcome views on the content and format of information that users of this report

would find useful.

Please send your comments to:

Peter Hicks

Senior Analyst, Electricity Distribution Costs and Outputs

Ofgem

9 Millbank

London

SW1P 3GE

[email protected]



Appendices

Appendix 2 – Distribution Network Operator contact information

1.1. Table A2.1 sets out the electricity distribution network operators (DNOs) contact information. Complaints regarding a

DNO that does not have a dedicated complaints phone number should be raised via their general enquiries phone number.

Table A2.1 DNO contact information

DNO Area Emergency / Loss of supply

(24 hour)

General enquires

Complaints Website address

Central Networks: West (CN West) West Midlands 0800 328 1111 0800 096 3080 www.central-networks.co.uk

Central Networks: East (CN East) East Midlands 0800 056 8090 0800 096 3080 www.central-networks.co.uk

Electricity North West Limited (ENWL) North West England 0800 195 4141 0871 687 0501 www.enwl.co.uk

CE Electric UK: Northern Electric Distribution Limited (CE NEDL)

Northeast England 0800 668 877 0845 070 7172 0800 781 8848 www.ce-electricuk.com

CE Electric UK: Yorkshire Electricity Distribution Limited (CE YEDL)

Yorkshire and North Lincolnshire

0800 375 675 0845 070 7172 0800 781 8848 www.ce-electricuk.com

Western Power Distribution: South Wales (WPD S Wales)

South Wales 0800 365 900 0845 601 2989 www.westernpower.co.uk

Western Power Distribution: South West (WPD S West)

South West England

0800 052 0400 0845 601 3341 www.westernpower.co.uk

UK Power Networks: London Power

Networks (UKPN LPN

London 0800 028 0247 0845 601 4516 0800 028 4587 www.ukpowernetworks.co.uk

UK Power Networks: South East Power

Networks (UKPN SEPN)

South East England 0800 783 8866 0845 601 4516 0800 028 4587 www.ukpowernetworks.co.uk

UK Power Networks: Eastern Power

Networks (UKPN EPN)

East Anglia 0800 783 8838 0845 601 4516 0800 028 4587 www.ukpowernetworks.co.uk

Scottish Power: Distribution (SP Distribution)

Central and Southern Scotland

0845 272 7999 0845 273 4444 www.spenergynetworks.co.uk

Scottish Power: Manweb (SP Manweb) Merseyside, Cheshire and North

Wales

0845 272 2424 0845 273 4444 www.spenergynetworks.co.uk

Scottish & Southern Energy: Hydro (SSE Hydro)

North Scotland 0800 300 999 0800 048 3515 www.ssepd.co.uk

Scottish & Southern Energy: Southern Electric Power Distribution (SSE Southern)

South England 0800 072 7282 0800 048 3516 www.ssepd.co.uk

http://www.central-networks.co.uk/

http://www.central-networks.co.uk/

http://www.enwl.co.uk/

http://www.ce-electricuk.com/

http://www.ce-electricuk.com/

http://www.westernpower.co.uk/

http://www.westernpower.co.uk/

http://www.ukpowernetworks.co.uk/



http://www.spenergynetworks.co.uk/

http://www.spenergynetworks.co.uk/

http://www.ssepd.co.uk/

http://www.ssepd.co.uk/



Appendices

Appendix 3 - The Authority‟s Powers and Duties

1.1. Ofgem is the Office of Gas and Electricity Markets which supports the Gas and

Electricity Markets Authority (“the Authority”), the regulator of the gas and electricity

industries in Great Britain. This appendix summarises the primary powers and duties

of the Authority. It is not comprehensive and is not a substitute to reference to the

relevant legal instruments (including, but not limited to, those referred to below).

1.2. The Authority's powers and duties are largely provided for in statute (such as

the Gas Act 1986, the Electricity Act 1989, the Utilities Act 2000, the Competition Act

1998, the Enterprise Act 2002 and the Energy Acts of 2004, 2008 and 2010) as well

as arising from directly effective European Community legislation.

1.3. References to the Gas Act and the Electricity Act in this appendix are to Part 1 of

those Acts.39 Duties and functions relating to gas are set out in the Gas Act and

those relating to electricity are set out in the Electricity Act. This appendix must be

read accordingly.40

1.4. The Authority‟s principal objective is to protect the interests of existing and

future consumers in relation to gas conveyed through pipes and electricity conveyed

by distribution or transmission systems. The interests of such consumers are their

interests taken as a whole, including their interests in the reduction of greenhouse

gases and in the security of the supply of gas and electricity to them.

1.5. The Authority is generally required to carry out its functions in the manner it

considers is best calculated to further the principal objective, wherever appropriate

by promoting effective competition between persons engaged in, or commercial

activities connected with,

the shipping, transportation or supply of gas conveyed through pipes;

the generation, transmission, distribution or supply of electricity;

the provision or use of electricity interconnectors.

1.6. Before deciding to carry out its functions in a particular manner with a view to

promoting competition, the Authority will have to consider the extent to which the

interests of consumers would be protected by that manner of carrying out those

functions and whether there is any other manner (whether or not it would promote

competition) in which the Authority could carry out those functions which would

better protect those interests.

39 Entitled “Gas Supply” and “Electricity Supply” respectively. 40 However, in exercising a function under the Electricity Act the Authority may have regard to the interests of consumers in relation to gas conveyed through pipes and vice versa in the case of it exercising a function under the Gas Act.



Appendices

1.7. In performing these duties, the Authority must have regard to:

the need to secure that, so far as it is economical to meet them, all reasonable

demands in Great Britain for gas conveyed through pipes are met;

the need to secure that all reasonable demands for electricity are met;

the need to secure that licence holders are able to finance the activities which are

the subject of obligations on them41; and

the need to contribute to the achievement of sustainable development.

1.8. In performing these duties, the Authority must have regard to the interests of

individuals who are disabled or chronically sick, of pensionable age, with low

incomes, or residing in rural areas.42

1.9. Subject to the above, the Authority is required to carry out the functions

referred to in the manner which it considers is best calculated to:

promote efficiency and economy on the part of those licensed43 under the

relevant Act and the efficient use of gas conveyed through pipes and electricity

conveyed by distribution systems or transmission systems;

protect the public from dangers arising from the conveyance of gas through pipes

or the use of gas conveyed through pipes and from the generation, transmission,

distribution or supply of electricity; and

secure a diverse and viable long-term energy supply, and shall, in carrying out

those functions, have regard to the effect on the environment.

1.10. In carrying out these functions the Authority must also have regard to:

the principles under which regulatory activities should be transparent,

accountable, proportionate, consistent and targeted only at cases in which action

is needed and any other principles that appear to it to represent the best

regulatory practice; and

certain statutory guidance on social and environmental matters issued by the

Secretary of State.

1.11. The Authority may, in carrying out a function under the Gas Act and the

Electricity Act, have regard to any interests of consumers in relation to

communications services and electronic communications apparatus or to water or

sewerage services (within the meaning of the Water Industry Act 1991), which are

affected by the carrying out of that function.

41 Under the Gas Act and the Utilities Act, in the case of Gas Act functions, or the Electricity Act, the Utilities Act and certain parts of the Energy Acts in the case of Electricity Act functions. 42 The Authority may have regard to other descriptions of consumers. 43 Or persons authorised by exemptions to carry on any activity.



Appendices

1.12. The Authority has powers under the Competition Act to investigate suspected

anti-competitive activity and take action for breaches of the prohibitions in the

legislation in respect of the gas and electricity sectors in Great Britain and is a

designated National Competition Authority under the EC Modernisation Regulation44

and therefore part of the European Competition Network. The Authority also has

concurrent powers with the Office of Fair Trading in respect of market investigation

references to the Competition Commission.

44 Council Regulation (EC) 1/2003.



Appendices

Appendix 4 - Glossary

A

The Authority/Ofgem/GEMA

Ofgem is the Office of Gas and Electricity Markets, which supports the Gas and

Electricity Markets Authority (GEMA), the body established by section 1 of the

Utilities Act 2000 to regulate the gas and electricity markets in Great Britain.

B

Business Carbon Footprint (BCF)

Total set of green house gas emissions caused directly and indirectly by the

operation of a business.

Benchmarking

The process used to compare a company‟s performance (eg its costs) to that of best

practice or to average levels within the sector.

Benchmarking methodology for CI and CML

In order to take into account inherent and inherited factors when comparing quality

of supply, Ofgem has developed a method for calculating benchmarks for CIs and

CMLs. In essence this method involves grouping physically similar parts of networks

together and then comparing performance at this more disaggregated level. Overall

benchmarks are then calculated for each DNO based on the number of circuits it has

in each group.

C

Capital Expenditure (Capex)

Expenditure on investment in long-lived distribution assets, such as underground

cables, overhead electricity lines and substations.

Competition Commission

An independent public body which conducts in-depth inquiries into mergers, markets

and the regulation of the major regulated industries.

Cost of Capital

This is the minimum acceptable rate of return on capital investment. It includes both

the cost of debt to a firm, and the cost of equity.

Cost of debt

The effective interest rate that a company pays on its current debt. Ofgem calculates

the cost of debt on a pre-tax basis.

Cost of equity



Appendices

The rate of return on investment that is required by a company's shareholders. The

return consists both of dividend and capital gains. Ofgem calculates the cost of

equity on a post-tax basis.

Customer interruptions (CIs)

The number of customers whose supplies have been interrupted per 100 customers

per year over all incidents, where an interruption of supply lasts for three minutes or

longer, excluding re-interruptions to the supply of customers previously interrupted

during the same incident. It is calculated as:

The sum of the number of customers interrupted for all incidents * 100

The total number of customers

Customer minutes lost (CMLs)

The duration of interruptions to supply per year – average customer minutes lost per

customer per year, where an interruption of supply to customer(s) lasts for three

minutes or longer, calculated as:

The sum of the customer minutes lost for all restoration stages for all incidents

The total number of customers

D

Depreciation

Depreciation is a measure of the consumption, use or wearing out of an asset over

the period of its economic life.

Distributed Generation (DG)

Any generation which is connected directly into the local distribution network, as

opposed to the transmissions network, as well as combined heat and power schemes

of any scale. The electricity generated by such schemes is typically used in the local

system rather than being transported for use across the UK.

Distribution Network Operators (DNOs)

A DNO is a company which operates the electricity distribution network which

includes all parts of the network from 132kV down to 230V in England and Wales. In

Scotland 132kV is considered to be a part of transmission rather than distribution so

their operation is not included in the DNOs‟ activities.

There are 14 DNOs in the UK which are owned by seven different groups.

Distribution Price Control Review 4 (DPCR4)

The fourth electricity distribution price control. This price control ran from 1 April

2005 until 31 March 2010.

Distribution Price Control Review 5 (DPCR5)



Appendices

The fifth electricity distribution price control. This price control will run from 1 April

2010 until 31 March 2015.

E

Electricity Distribution Price Control Review 1 (RIIO-ED1)

The price control review to be applied to the electricity distribution network

operators, following DPCR5. This price control would be expected to run from 1 April

2015.

Electricity Safety, Quality and Continuity Regulations 2002 (ESQCR)

The ESQCR specify safety standards, which are aimed at protecting the general

public and consumers from danger. In addition, the regulations specify power quality

and supply continuity requirements to ensure an efficient and economic electricity

supply service to consumers.

I

Independent distribution network operators (IDNOs)

Any electricity distributor whose licences were granted after 1 October 2001. IDNOs

do not have distribution services areas.

Interruptions Incentive Scheme (IIS)

On 1 April 2005 Ofgem introduced a revised interruptions incentive scheme which

provides financial incentives to DNOs with respect to the average quality of service

they provide in terms of:

the number of interruptions to supply, and

the duration of interruptions to supply.

DNOs may be rewarded or penalised by up to 3 per cent of revenue, depending on

performance relative to their interruptions targets in each year of the scheme.

K

Kilowatt (KW)

A measure of energy equal to one thousand watts.

L

Log up / logging up

A mechanism under which a company will be compensated for all, or part, of its

actual expenditure on a particular activity or area, through the revenue allowance set

at the next price control review.

Low carbon networks fund (LCNF)

Funding to encourage the DNOs to innovate to deliver the networks we will need for

a low carbon economy.



Appendices

M

Megawatt (MW)

A measure of energy equal to one thousand Kilowatts.

N

Net Present Value (NPV)

Net present value is the discounted sum of future cash flows, whether positive or

negative, minus any initial investment.

O

Operating expenditure (opex)

Expenditure on the day to day operation of a network such as staff costs, repairs and

maintenance and business overheads.

Outputs

Output information is to be used to assess network company performance against

the outcomes within a control period. This information may be both qualitative and

quantitative in nature.

P

Price control (control)

The control developed by Ofgem to set targets and allowed revenues for network

companies. We develop the characteristics and mechanisms of a price control taking

account of network company performance over the last control period and predicted

expenditure in the next.

R

Regulatory asset value (RAV)

The value ascribed by Ofgem to the capital employed in the licensee‟s regulated

distribution or (as the case may be) transmission business (the „regulated asset

base‟). The RAV is calculated by summing an estimate of the initial market value of

each licensee‟s regulated asset base at privatisation and all subsequent allowed

additions to it at historical cost, and deducting annual depreciation amounts

calculated in accordance with established regulatory methods. These vary between

classes of licensee. A deduction is also made in certain cases to reflect the value

realised from the disposal of assets comprised in the regulatory asset base. The RAV

is indexed to RPI in order to allow for the effects of inflation on the licensee‟s capital

stock. The revenues licensees are allowed to earn under their price controls include

allowances for the regulatory depreciation and also for the return investors are

estimated to require to provide the capital.

Regulatory instructions and guidance (RIGs)

A document that is published as part of the price control settlement which sets out

further detail on how the price control is to be implemented and how compliance with

it will be monitored.



Appendices

Re-openers

A process undertaken by Ofgem to re-set the revenue allowances (or the parameters

that give rise to revenue allowances) under a price control before the scheduled next

formal review date for the relevant price control.

Retail Price Index (RPI)

An inflation index, which measures the aggregate change in consumer prices over

time.

Return on regulatory equity (RoRE)

Return on Regulatory Equity is a regulatory metric that we have developed to

understand the returns available to shareholders in regulated networks from our

price control packages. We include the effects of all material incentives, drivers and

true-ups ,even where adjustments take place in a subsequent price control period.

We maintain our notional gearing assumption, though, which may lead our results to

differ from what companies achieve in practice.

RIIO (Revenue = Incentives + Innovation + Outputs)

Ofgem's new regulatory framework, stemming from the conclusions of the RPI-X@20

project, to be implemented in forthcoming price controls. It builds on the success of

the previous RPI-X regime, but better meets the investment and innovation

challenge by placing much more emphasis on incentives to drive the innovation

needed to deliver a sustainable energy network at value for money to existing and

future consumers.

S

Statutory instruments (SIs)

UK Government secondary legislation.

Sustainable development

Refers to economic development which meets the needs of the present without

compromising the ability of future generations to meet their own needs.

W

Weighted Average Cost of Capital (WACC)

This is the weighted average of the expected cost of equity and the expected cost of

debt.

Worst served customer (WSC)

Customer experiencing greater than or equal to five higher voltage interruptions on

average over a three year period i.e. 15 or more over three years. Additional caveat

of a minimum of three higher voltage interruptions in each year.



Appendices

Appendix 5 - Feedback Questionnaire

1.1. Ofgem considers that consultation is at the heart of good policy development.

We are keen to consider any comments or complaints about the manner in which this

consultation has been conducted. In any case we would be keen to get your answers

to the following questions:

Does the report adequately reflect your views? If not, why not?

Does the report offer a clear explanation as to why not all the views offered had

been taken forward?

Did the report offer a clear explanation and justification for the decision? If not,

how could this information have been better presented?

Do you have any comments about the overall tone and content of the report?

Was the report easy to read and understand, could it have been better written?

Please add any further comments?

1.2. Please send your comments to:

Andrew MacFaul

Consultation Co-ordinator

Ofgem

9 Millbank

London

SW1P 3GE

[email protected]