pr4 implementation consultation response - submitted · the timeline outlined below is proposed for...

Submitted Version of 19 26/01/2018

PR4 Implementation

Consultation Response

Status: SUBMITTED

Date: 26.01.2018


Contents 1 Introduction ............................................................................................................................................................. 3

2 Transmission – Performance Reporting .................................................................................................................... 3

2.1 Output-based reporting – Proposal 1 ................................................................................................... 3

2.2 Capex monitoring – Proposal 2 ............................................................................................................. 4

2.3 Capex adjustment process – Proposal 3 ............................................................................................... 4

3 Transmission Performance Incentives ...................................................................................................................... 5

3.1 Project Delivery (TAO) ........................................................................................................................... 5

3.2 Outage Management (TAO) .................................................................................................................. 6

3.3 Stakeholder Engagement (TAO) ............................................................................................................ 6

4 Distribution System Performance Reporting ............................................................................................................ 7

4.1 Output Measures .................................................................................................................................. 7

5 Distribution System Performance Incentives ............................................................................................................ 8

5.1 Unplanned Outages .............................................................................................................................. 8

5.2 Worst Served Customers..................................................................................................................... 10

5.3 Customer Service ................................................................................................................................ 10

5.4 Metering – Traditional ........................................................................................................................ 13

5.5 Metering – Smart ................................................................................................................................ 13

5.6 Stakeholder Engagement .................................................................................................................... 16

5.7 Strategic and Innovative Thinking ....................................................................................................... 16

6 Summary ............................................................................................................................................................... 18

REFERENCES .................................................................................................................................................................... 19


1 Introduction

As distribution system operator (DSO), distribution asset owner (DAO) and transmission asset owner (TAO),

ESB Networks (ESBN) works to meet the needs of all Irish electricity customers, delivering and managing the

performance of a system of almost 155,000 km of overhead networks, over 23,000 km of underground cables.

over 646 high voltage substations, approaching 2.3 million demand customers, and now almost 300 generation

customers connected to the distribution system.

On December 12th 2017 the Commission for Regulation of Utilities (CRU) published its proposals for new

performance reporting and incentive measures which would apply for the remainder of the Price Review 4

regulatory period (2016 – 2020). ESBN welcomes this consultation as an important step towards a decision

affording greater certainty as to necessary revenues, and better guidance as to CRU’s performance

expectations.

In this response ESBN agrees with and supports most of the underlying policy intent and many of the specific

proposals. It also intends to clarify a number of details and address aspects of the proposals which might be

improved in how they reflect customers’ needs and preferences, or which could be more effective in how they

deliver a meaningful signal to the DSO/DAO/TAO.

This document is written in an order and manner consistent with the CRU consultation paper. It has been

presented in this manner strictly for ease of consideration alongside the proposals put forward by CRU.

2 Transmission – Performance Reporting

2.1 Output-based reporting – Proposal 1

ESBN is committed to meaningful, accessible and transparent performance reporting. To date our

responsibilities as TAO have been reported in ESB Networks Annual Performance Report, which primarily

reports distribution system performance and delivery. We welcome CRU’s proposals as to how transmission

system performance reporting could be improved and aligned to a clearer structure, with transmission system

and distribution system reporting separated, and TAO and TSO reporting consolidated.

Delivering this new consolidated report will demand an iterative and intensive, coordinated development

project undertaken jointly by the TSO and the TAO. ESBN looks forward to delivering this with the TSO.

We note that an achievable timetable for the development and delivery of this new report must be agreed.

This should provide for CRU guidance, direction and input on the suitability of proposals brought forward, so

that a report can be delivered regarding 2017 performance to an approved format and structure. The timeline

outlined below is proposed for CRU’s consideration.


Date Action

Q1 2018 CRU Decision

Q2 2018 TSO / TAO develop & submit proposal to CRU

Q3 2018 CRU considers proposal & provides guidance

Q4 2018 TSO / TAO prepare & submit 2018 APR

2.2 Capex monitoring – Proposal 2

As TAO, ESBN welcomes proposals by the CRU intended and expected to improve CRU’s ability to consider and

assess the submissions made. The TSO and TAO deliver very extensive quarterly and annual capex programme

delivery reporting at present. If this can be changed in terms of scope, volume or frequency of delivery to

better meet CRU’s needs, and to deliver more meaningful and accessible information for customers, such

proposals are welcome.

Of the three elements of Proposal 2, parts (b) and (c) apply to the TAO. Reporting information annually rather

than quarterly would reduce the resourcing and processing activities involved in compiling and delivering

quarterly reports. If this proposal continues to meet CRU’s needs, it would offer a more efficient solution.

ESBN notes that quarterly reporting to CRU is additional to internal management and monitoring activities, on

which there would be no impact.

2.3 Capex adjustment process – Proposal 3

On occasions where extraordinary or unexpected changes in demand or generation drive the needs for

materially different capital investment programmes and delivery within the Price Review period, it is important

that these are subject to effective and rigorous assessment, involving the TSO, TAO and CRU, representing all

electricity customers.

ESBN welcomes CRU’s proposal to put clearer structures around how such proposals and assessment could be

undertaken. ESBN notes, however, that extraordinary circumstances may arise suddenly and develop rapidly.

At a period of substantive market changes affecting the Irish generation portfolio, its interaction with and

distribution relative to demand in Ireland, and as clusters of data centres – large point loads – drive new

development plans and objectives, we suggest that while the mechanism proposed by CRU offers value, that a

single nominal trigger date in a given year may not be a practical, flexible or effective aspect of this proposal.


3 Transmission Performance Incentives

3.1 Project Delivery (TAO)

As Transmission Asset Owner, ESBN delivers all transmission system development projects. Delivering these

projects in line with the system needs and solutions indicated by the TSO ensures that the transmission system

continues to meet the needs of the market and of overall system reliability.

As stated in Proposal 6, the TAO’s role in project delivery is narrower than that of the TSO. This lends itself to

a clear, measurable and well defined incentive mechanism. The incentive mechanism which was in operation

during PR3, links rewards or penalties to the timeliness of delivery of Project Initiation Plans (PIPs), and

delivery of the scheduled construction and energisation of new transmission infrastructure.

ESBN believes that this continues to reflect the role which the TAO must deliver and remains an appropriate

performance indicator. As such, ESBN supports the second option proposed by CRU, as a continually

challenging, ongoing performance incentive.

Should CRU alternatively pursue the first option, the detailed design of this mechanism must ensure that the

TAO is incentivised to deliver elements of performance that are within its control, and its role in delivering

transmission infrastructure. Any re-design should not inadvertently transfer rewards and penalties between

TSO and TAO in an unintended manner which would dilute any effective or meaningful performance signals.

Furthermore, ESBN is concerned that the proposed reward/penalty model associated with Option 1 of

Proposal 6 provides a very limited signal. As presented, there is no performance level between zero (net audit

cost) and the cap (maximum reward) on this incentive. This may not provide a very meaningful or effective

signal, in the absence of further insight into the criteria and performance levels associated with “strong”.

If CRU pursues Option 1, ESBN expects that a more graded model will be designed, which rewards a more

representative spectrum of good performance. It is reasonable to expect that some reward would be

available for meeting challenging but reasonable targets, under conditions where recovering the maximum

incentive reward may not be efficiently achievable.

The TSO and TAO project delivery incentives have been structured in a complementary manner to date – ESBN

hopes that this is achievable if any alternative model is adopted, to support well-coordinated, efficient end-to-

end transmission system development. ESBN believes that retention of the existing TAO project delivery

incentive, in its current form, as per Option 2 of Proposal 6, is the best means of achieving this.


3.2 Outage Management (TAO)

Core Mechanism

The TAO is committed to meeting the scheduled outage programme prepared by the TSO, which reflects the

planned maintenance outage requirements of market participants, provides transparency and supports

transmission system users’ effective scheduling and planning, in addition to project delivery.

The value of this has been reflected to date in the core outage management incentive, and ESBN welcomes the

intent that this be retained. In the absence of any evidence or suggestion that the value of delivering outages

in line with the expectations of the TSO and affected customers has diminished, we believe this to be

appropriate. We believe that the value of the outage management incentive applied in PR3 should be retained

in full.

Meeting the transmission outage schedule to the performance levels set out in this incentive – full reward only

with 95% or above performance and no incentive for any performance below 90% – continues to be extremely

challenging. It demands consistent good performance delivering work and operations on the ground, with

ownership and responsibility shared by management, engineers, coordinators, supervisors, operators and

technicians completing works over the 9,000 – 10,000 outage days typically each year.

New Outage Flexibility Mechanism

The reasoning supporting Proposal 7 outlines that well-coordinated and efficiently delivered outage

management could create new value in the market. ESBN would welcome the opportunity to support this

being realised, within reasonable costs and when this is expected to deliver value for money.

ESBN agrees with the proposal that the associated additional delivery costs and a reasonable incentive reward

would be made available to the TAO in such cases. Given the interdependencies, dedicated planning and

resource management associated with delivering work on the transmission system, the proposed flexibility will

almost certainly introduce new risks and challenges.

As TAO, ESBN urges that care is taken to ensure that outage flexibility does not compromise the ability of the

TAO to efficiently deliver transmission system activities, or result in unintended knock-on impacts on other

projects or outages. In line with this, ESBN strongly agrees with the note that if this new mechanism were

introduced, monitoring over the remainder of PR4 must demonstrate that the value for money is delivered.

We look forward to engaging with CRU and the TSO over the remainder of PR4 to ensure that this is achieved

in an informed and complete manner.

Finally, the value of meeting the published outage programme (the core outage incentive) has not diminished,

and as this new proposal is intended to create new value, ESBN believes that the revenue associated with this

incentive should be treated as new and additional incentive revenue, and not a redistribution of the revenue

associated with the core outage incentive.

3.3 Stakeholder Engagement (TAO)

CRU has proposed that a common Stakeholder Engagement incentive be introduced for the TAO, TSO and

DSO. As DSO, ESBN believes this would support its delivering value for customers, and afford customers

greater transparency and access to the DSO. However we do not believe that a TAO stakeholder engagement

incentive would deliver the same value.

ESBN agrees that stakeholder engagement regarding the development and performance of the transmission

system is important to customers. However, as reflected throughout Proposals 1, 2, 4 and 5, the transmission

system development strategy, and system performance, are reflected in the role of the TSO, and not the TAO.


In the absence of evidence that a TAO Stakeholder Engagement plan meets an identified customer need, or

contributes to clear and accessible engagement and communications, ESBN does not at this time support

Proposal 8 insofar as it applies to the TAO. Furthermore, ESBN is concerned that its introduction may

obfuscate the relationship between customers and the transmission system operator, and customers

understanding of how transmission system development and performance are managed. ESBN does not

believe this to be CRU’s intent.

4 Distribution System Performance Reporting

4.1 Output Measures

ESBN is committed to accessible, useful and meaningful performance reporting. Distribution system

performance reporting should provide customers with the information which allows them to clearly identify

the value delivered, and performance in the aspects of system performance which are most valuable and

meaningful to them.

ESBN acknowledges that the current Annual Performance Report has the “look and feel” of a regulatory

submission. The current report is designed primarily to meet the requirements of the Performance Reporting

Criteria approved by CRU reflecting Condition 13 of the DSO licence and condition 11 of the TAO licence, which

requires the submission of a report setting out the criteria against which the performance of the DSO and TAO

can be measured. The criteria currently approved are published on ESB Networks' website.

We believe that distribution system performance reporting can and should deliver greater value to our

customers and to ESBN in future, by informing and supporting customer engagement. A clear and accessible

view of current performance, its successes and its limitations, is an important first step in identifying what

development, investment and system management strategies best meet our customers’ future expectations.

Finally, given the time, care and effort involved in designing a new Annual Performance Report, and the need

to ensure a truly accessible, useful and appealing report, ESBN notes that an achievable timetable for the

preparation, submission and approval both of the new reporting template and the 2018 performance report

must be agreed.


5 Distribution System Performance Incentives

5.1 Unplanned Outages

ESBN believes that managing unplanned outages is fundamental to the service that distribution system

customers receive. It reflects continued investment in and use of operational control systems, smart

technologies, ongoing investment in network renewal and maintenance, and the delivery of targeted,

innovative interventions to support performance through automation and remote control.

ESBN agrees with the policy intent expressed in Proposal 12 and the reasoning provided – that incentives

should be updated using new information on the levels of performance achievable by the DSO. This is

consistent with CRU’s other incentive proposals for 2018 – 2020.

ESBN is concerned, however, that the proposal that the PR3 performance target for 2015 be used instead as a

CML incentive target, reflects outdated information and neglects the context of the period since 2008/2009

when it was originally proposed. It is inconsistent with the stated policy intent, and the associated step change

in performance would demand a commensurate step change in investment. ESBN questions whether this

additional investment accurately reflects customers’ preferences and how they value affordability against the

incremental improvement delivered.

Over the period following the proposal of this target in 2008 / 2009 and reflecting customers’ needs at the

time, ESBN, in consultation with CRU, reduced its 2011 – 2015 capital investment programme from €4.2bn

(agreed in 2008/2009) to €2.4bn (i.e. 43%). This delivered a significant benefit for distribution system


customers and the economy, showing due regard for customers and the affordability of price increases, by

avoiding a nominal DUoS price increase of 16%.

Activities which were necessary to ensure the continued safety of the network were continued, but many

other activities which directly affect network performance were deferred or scaled back. As such, a

performance target being set in 2018 should not retrospectively seek to reflect investments and benefits

which did not occur, for legitimate reasons reflective of customers’ needs at the time.

As 2016 outturn data is now available in full and as 2016 represents a year of normal operation, ESB Networks

suggests that actual performance over the period 2012-2016 should inform the target baseline calculation.

Continued improvement

ESBN is working to deliver continuous improvement, thus proposes that the outage performance targets could

reflect continuous improvement in line with the level of investment being made in targeted, innovative

continuity improvement measures.

Very challenging, but potentially achievable targets, are as illustrated in Table 1 below. These are calibrated

using average outturn data 2012 - 2016 (omitting storm events, as per the proposed storm event definition)

with annual performance improvement reflecting the ESBN Continuity Improvement Programme.

2018 2019 2020

CML 79.5 76.3 73.1

CI 102.5 100.05 97.6

Table 1: Proposed targets

Storm treatment

Setting an accurate and up to date storm threshold test and definition, which determines whether an event is

sufficiently extreme, anomalous and beyond the reasonable control of the system operator, is common

practice in utility performance monitoring and incentivisation worldwide.

By setting an accurate and up to date storm threshold, CRU ensures that the outage incentive remains:

• Effective: it focusses the incentive on aspects of network performance which are within ESBN’s

control and which ESBN can influence through its activities and investments

• Efficient: the incentive promotes only those activities and decisions whose benefit to customers

clearly and sufficiently exceeds the associated costs

• Transparent: targets and reporting against a valid storm threshold provides CRU and customers with

an accurate measure of distribution system performance

ESBN is concerned that the storm threshold test applied during PR3 no longer meets these objectives. The

baseline data used to set this threshold is from 1999 – 2001, and no longer represents normal network

performance, nor the performance which our customers reasonably expect. Standard practice elsewhere is

for the data used to set such thresholds being periodically updated, for example at each Price Review process

[1]. As such we agree with CRU’s proposal that updated data be used. ESBN wishes to confirm that it is CRU’s

intention to recalibrate this threshold each Price Review going forward.

The methodology used to set the PR3 threshold was a bespoke one, thus ESBN agrees that it would be prudent

and reasonable to adopt a normal, international, standardised measure, as provided in IEEE standard 1366-

2012.


Finally, ESBN agrees with CRU’s proposal that the storm classification should allow for storm events rather

than just storm days. This is consistent with practice elsewhere [2] and a better reflection of the impact of

major storm events on networks, on ground and working conditions, and on the safety and welfare of front

line staff responding to extreme weather events.

Planned outage incentive

ESBN supports the proposal that the allocation of revenue to the planned outage incentive be discontinued,

with a reputational incentive remaining. ESBN notes that customer satisfaction with respect to planned

outages is measured monthly in CRU approved and mandated customer satisfaction surveying; ESBN

consistently achieves its highest levels of customer satisfaction against the planned outage metric. ESBN

values customers’ needs, and will continue to deliver the service reflected in this level of satisfaction.

Use of Available Revenue at Risk

As with the Customer Service incentive package, CRU have proposed that the revenue allocated to the

unplanned outage incentive in 2016 and 2017 be redistributed over the remaining years of the price review.

ESBN proposes that more effective use could be made of some of this revenue. Specifically, ESBN proposes

that €6m of the incentive revenue which could be earned be reallocated from the continuity incentives to

provide revenue that could be earned for good performance against the Smart Metering incentive.

This represents just 6% of the total revenue available to be earned for good performance in the outage

incentive – which is relatively mature and stable, a core element of ESBN’s ongoing activities, subject to

additional reputational incentive and also explicitly contributes to the Customer Satisfaction incentive. By

transferring it to the Smart Metering incentive, a more significant and meaningful signal regarding the priority

of this programme relative to other capital investment programmes might be provided.

5.2 Worst Served Customers

The Irish distribution system is unique, reflecting Irish settlement patterns over time. A network built to reach

all Irish customers, in all locations no matter how remote, rural, coastal, with multiples of the average length

or overhead network per customer, has been design to meet the needs, lifestyles and heritage of customers.

However it can lead to certain localised conditions where customers are subject to greater outage impacts

than the performance which most customers receive.

Typically the causes are localised, can be challenging to identify but with innovation and care, can be

addressed. They typically relate to wildlife migration patterns, livestock, agricultural land use, wetlands for

example.

ESBN welcomes CRU drawing greater focus to the needs of these customers, and signalling a belief that there

can and should be a greater value attributed to improving the network performance they receive. ESBN

considers that the proposed incentive programme could deliver value to a small subset of customers whose

supply reliability is of a significantly lower standard than average performance.

5.3 Customer Service

Our customers and the market rely on the high quality of service we provide, and customer satisfaction,

represented by customers’ own judgement and by standard performance metrics, is amongst the most

important measures of our performance. ESBN welcomes a continued focus on customer service through

performance incentives.

ESBN agrees that outturn in recent years provides an accurate indicator of current performance. ESBN notes

that this performance during PR3 has not been easily achieved, but is the result of concentred and extensive

actions to deliver the performance our customers expect. The Networks Customer Care Centre (NCCC), whose


performance is measured in the Customer Service incentives, provides a 24 hour, 7 days per week customer

call service to all electricity customers. ESBN’s staff have thousands of daily touchpoints with customers. Over

2,000 field staff work in the community on a daily basis and the 24 hour NCCC deals with over 1.8 million

customer contacts annually.

ESBN has invested in advanced call centre analysis to support resourcing and scheduling. To manage sudden

increases in volumes (for example during storm conditions), during such periods ESBN uses the services of an

external call centre to support the NCCC and ensure that customer service targets are maintained. Initially this

support covered normal opening times, and from November 2014 was extended to 24 hours.

We understand that different customers want to communicate with us in different ways and at times that suit

them. ESBN is constantly seeking to introduce new communications channels and improve existing ones to

meet rising customer expectations. New customer service channels introduced, include online fault logging,

and updated website, e-mail and Twitter, and the PowerCheck App for phone and online use that offers up to

date information on power outages and restoration times.

Revenue allocation

CRU has proposed that the revenue associated with 2016 and 2017 performance be allocated as additional

revenue at risk in the customer satisfaction incentive mechanisms. ESBN proposes that a more effective

means of delivering value for customers with this revenue would be to allocate the incentive revenue (up to

€7.4m total, or €2.5m p.a.) to the newly proposed Stakeholder Engagement incentive (Proposal 17). ESBN

believes that a commitment to customers means more than just what is reflected in perception today. It

demands that the channels are in place to ensure customers’ values, needs and expectations can be identified

and reflected in future development strategy. (For further detail, please see Stakeholder Engagement).

Customer Satisfaction

ESBN agrees that current performance should inform targets set, and expects that CRU would seek to consider

outturn performance which gives a reasonable and balanced view of ESBN’s performance over a relevant

period.

Nonetheless, context is important when considering our performance in PR3. The customer satisfaction

survey assesses satisfaction with six areas of performance:

- Unplanned outages

- Planned outages

- Voltage complaints

- New individual connections

- New scheme and apartment connections

- New business connections

There is a particularly close correlation and interdependence between these activities and economic and

construction activity. This in particular is the case where exceptional circumstances of the past decade mean

that a longer run average may be appropriate to ensure that short run extremes do not distort the target set.

ESBN suggests that this target, and how ESBN meets it, should balance speed of delivery, cost to our

customers and quality, while preserving the safety of our staff, customers and the public.

The ability to respond to competing customer needs varies with demand arising of economic and construction

activity. Historic performance reflects this, thus ESBN’s most recent performance at periods of both high and


low economic and construction activity should be considered to gain an accurate picture of performance. The

period 2011 – 2015 was one of extremely low levels of economic and construction activity, thus does not give

an accurate indication of performance under normal conditions.

Figure 1: Customer satisfaction 2006 - 2014

ESBN’s average performance over the period 2004 – 2015 reflects a wider and more representative range of

economic conditions. Our average performance over this period was 76.5%. Reflecting ESBN’s and CRU’s

intent to incentivise performance improvement, ESBN proposes that an appropriate target for 2018 – 2020

would be an initial 2018 target of 78%, increasing to 80% by 2020.

Customer Satisfaction – National Customer Contact Centre performance (ESATRAT)

Weight 2016 2017 2018 2019 2020

Speed of Telephone Response 25% - - 88% 88% 88%

Call Abandonment Rate 25% - - 4% 4% 4%

Customer Call-Back survey results 20% - - 88% 88% 88%

Mystery Caller survey results 15% - - 83% 83% 83%

First Contact/Call Referral 15% - - 10% 10% 10%

ESATRAT16 (Performance target) 100% - - 90% 90% 90%

Table 2: ESATRAT Incentive – clarification of breakdown.

As with other customer performance metrics, ESBN welcomes a continued emphasis on call centre (NCCC)

performance. It is noted that in Table 3 on page 41 of the consultation paper, relating to Customer Call-Back

survey and Mystery Shopper results, it appears that the intended target levels for these two components of

the target have been transposed. For the avoidance of doubt, ESBN would like to confirm that the shaded

values in Table 2 below reflect CRU’s intended targets.


The values as laid out in this table set a higher target for the Customer Call Back Survey, to which a higher

weight is applied. This would reflects practice to date, and the principle that customers’ own, direct feedback

is attributed greater value than other research methods.

Storm Management

An increasing number and severity of storms since 2012 is a cause of concern. The most recent in October

2017 (Ophelia) resulted in 386,000 customers losing supply for a time. ESBN’s incentivised performance

currently includes calls received during storm conditions.

We appreciate the ability to contact ESBN, and the information which ESBN provides using a range of media

under storm conditions, is particularly important. As such, during storms, additional measures are undertaken

to ensure that our customers can reach us. are provided with the information they need through a range of

channels, including PowerCheck, Website, IVR, Social Media, Radio and TV.

The range of channels available notwithstanding, the volumes of calls on the first few days of such storms are

in the region of 56,000-72,000. On a normal day, calls are in the region of 2,000. This means that although

additional staff are deployed to answer calls, speed of response and abandon rates are severely affected.

ESBN notes that in the event of storms of the scale which justify the suspension of transport, public services

and business activities, the need to ensure the safety of ESBN staff may make managing storm centre

performance metrics more challenging.

In recent years, total annual calls to the NCCC have been elevated by 17% (2014) – 19% (2017) as a result of

storms. In light of these concentrations of calls in very short periods of time, and the limited number of calls

over the rest of the year to recover average performance rates, the increased speed of response criterion

proposed in this consultation (88%) may prove exceptionally challenging if there is continued storm activity of

this scale.

5.4 Metering – Traditional

The metering services and performance levels which ESBN delivers are fundamental to the operation of the

retail market, and immediately and directly affect the accuracy of customers’ bills. ESBN considers it

absolutely appropriate that until such time as traditional metering is no longer the primary means of meter

data collection, performance consistent with the needs of customers and the retail market should continue to

be incentivised.

ESBN acknowledges that meeting the targets which were active during PR3 continually proved challenging, and

agree that these targets reflect a reasonable target going forward.

5.5 Metering – Smart

The National Smart Metering Program (NSMP) is a complex programme of work spanning multiple years,

involving many diverse stakeholders. ESBN is committed to successfully delivering this national roll out of

electricity and gas smart metering in an effective and efficient manner, so that the benefits of smart metering

can be realised by all energy customers. This will commence with the installation of 250,000 meters before

the end of PR4, in parallel with delivering the back-end IT systems necessary to deliver smart functionality –

retail market facing registration systems and the remote collection and delivery of 30-minute interval data.

Though ESBN is committed to the delivery of this programme, and notes that the proposed revenue at risk

reflects a view of the level of investment being made, the proposed value of this incentive is extremely high.

Furthermore, given the scale and ambition of the programme, a downside-only incentive would be

inappropriate and unreasonable. Put in context, Phase 1 of the NSMP will seek to install smart meters in 10%

of all homes and businesses in Ireland. It has taken four years to achieve this same penetration in the UK.


Incentive design

A balanced incentive should protect customers from poor performance, but also signal the relative priority and

value of activities, and should reward the regulated party for adapting and delivering new or challenging

activities, and performance beyond business as usual (see for example [3]- [4]). ESBN believes that delivery of

Phase 1 of the NSMP as outlined in CRU proposals would meet these criteria.

By failing to allocate any reward to this incentive, rather classifying the standard WACC earned on all capital

investment programmes as the potential reward, CRU is indicating that this programme has the same value as

all other capital investment activities.

Penalty-only incentives, or asymmetrical incentives with greater downside than upside are typically adopted

where customers will suffer a loss of service relative to what they expect and are used to as a result of under

delivery. Examples of this include the asymmetry of ESBN’s customer satisfaction incentive, or the Complaints

Metric component of the Broad Measure of Customer Service incentive in operation in GB, where penalty only

design is designed to reflect that adequate or good complaint handling does not necessarily deliver an

incremental benefit to the customer or company.

ESBN will ensure customers can realise the benefits of smart metering. However until smart metering is

delivered, customers will continue to have their current metering services and performance. This performance

continues to be incentivised in PR4 (see Metering – Traditional), in parallel with this Smart Metering incentive.

Delivery of the smart metering programme brings new and different challenges, as is expected in one of the

most substantial and customer-facing infrastructure delivery programmes undertaken in recent history. ESBN

believes that a meaningful incentive provided by CRU should acknowledge ESBN’s performance in overcoming

these challenges.

Balanced Incentive Proposal

A more balanced model can be delivered which reflects the value CRU believes the smart metering programme

should deliver to customers. Regarding the volumetric portion of the incentive (proportional to the volume of

meters installed), it is proposed that on achieving 80% volume delivery (200,000 meters), ESBN would not be

subject to either reward or penalty. From 80% to 100% (250,000 meters), the same value per meter installed

should apply as proposed by CRU.

This would result in incentive revenue of up to €6m which could be earned by ESBN with the delivery of

250,000 meters and the full capability to delivery Phase 2 smart functionality by end of 2020. Only €3m of

incentive revenue could be earned by ESBN in case of the installation of 250,000 meters but without Phase 1

smart functionality by end 2020.

Regarding the portion of the incentive associated with the ability to deliver smart functionality, ESBN believes

that a penalty-only incentive design is neither reasonable nor appropriate. Reflecting the value which CRU

attributes to this programme, and ESBN’s commitment to it, a more appropriate structure would be a penalty

of €12m in case smart functionality is not delivered, and incentive revenue earned of €3m if ESBN can deliver

full smart functionality capability by end 2020.

In case of programme delays which are the result of conditions outside the control of ESBN, it is proposed that

the incentive revenue available to be earned would reduce over the first 6 months of 2021. This only begins to

reflect the complexity and scale of the programme, and the extent of third party dependencies which cannot

be effectively designed out of this mechanism (and is implicit in a programme premised on obtaining access to

customers’ homes in many cases).


By Easter 2021, the installation of 250,000 meters would result in revenue earned of €3m with smart

functionality available, or €1.5m without. By end June 2021 the installation of 250,000 meters with smart

functionality available would result in neither penalty nor reward.

Customers’ Data Protection

ESBN would like to confirm that success against the target corresponds with the delivery of all systems and

meters to provide smart functionality to 250,000 customers. By delivering a full smart infrastructure (meters,

telecommunications infrastructure and back-end systems), once a customer, via their supplier, confirms their

permission and preference for smart functionality, ESBN can “switch it on” immediately.

ESBN is taking care to ensure that the data privacy needs of all of our customers are met in full in delivering

the NSMP. With a new data protection framework – the General Data Protection Regulation (GDPR) – being

introduced in Ireland from May 2018, ESBN may be precluded from collecting smart meter data and delivering

it to suppliers without additional explicit consent from customers, to be provided by suppliers.

NSMP design provides for certain customer-facing activities to be supplier-led. This includes supplier

enrolment of customers for the initial Phase 1 rollout. ESBN hopes that the actions of suppliers ensure that as

many customers as possible avail of smart services from the outset, but cannot be held to account if this is not

the case.

We believe that success criteria as outlined above would best reflect the role and responsibilities of ESBN in

delivering this programme, while recognising what is within its control and respecting customers’ data privacy

rights and preferences.

Delivery risks

ESBN agrees with the proposal that a 6 month grace period should reasonably apply where conditions outside

the control of the DSO give rise to delays. This is a modest period, which reflects both the scale of

interdependencies, and the roles allocated to many different stakeholders in this process, including all

electricity suppliers, CRU and electricity customers themselves, and the steps which ESBN is taking to mitigate

such risks.

This provision notwithstanding, ESBN notes that the delivery of this programme in its current form is

absolutely contingent on relative stability of the retail market structure and systems. Furthermore, strict

obligations regarding smart metering rollout, including functionality, services, and compatibility with

wholesale electricity market design, are subject to European debate, as proposed in the recast Directive on

common rules for the internal market in electricity.

In case of force majeure events affecting the retail market or other fundamental energy market, customer or

regulatory frameworks, beyond the control of ESBN, it is expected that a “release valve” would be available

whereby that subject to CRU agreement, the incentive mechanism could be switched off.

Incentive Timeline

Table 7, on page 59 of the consultation paper, indicates that the Smart Metering incentive would be active in

2018 and 2019. ESBN would welcome reasonable proposals CRU may have as to how high priority project

delivery milestones, might be reflected in agreed targets for these years. However as the rollout of smart

meters will commence no earlier than the end of 2019, volume-linked targets for 2018 or 2019 are not

feasible.

This is consistent with Phase 1 project design, whereby procurement and other development processes must

be completed before it is possible to commence the installation of meters in customers’ homes and


businesses. As such, the earliest target date for any volumetric component of the Smart Metering incentive

would be December 2020.

5.6 Stakeholder Engagement

Delivering value for our customers means more than delivering the commitments captured in any given Price

Control Decision. It means putting the channels in place to listen to customers, and ensure that customers’

needs, preferences and values are reflected in how we develop and manage the network in future. ESBN is

committed to identifying and delivering the engagement activities and platforms that meet customers’

information and feedback requirements.

As such, ESBN welcomes the opportunity to demonstrate this and to work with CRU to ensure that this reflects

CRU’s expectation in full. However, as stated previously, we believe that a meaningful commitment to

incentivising customer engagement can only be achieved with the allocation of incentive revenue. We

propose that the revenue associated with customer satisfaction in 2016 and 2017 should be allocated to this

incentive, over the full period 2018, 2019 and 2020, or a maximum incentive of €7.4m total or €2.5m p.a.

The proposed incentive design, whereby ESBN submits a stakeholder engagement strategy, delivery against

which would be scored annually, appears appropriate and consistent with comparable incentive design in our

neighbouring jurisdiction, GB. For this incentive to operate effectively, ESBN believe it is important that CRU

can give clear and timely approval or feedback on the submitted engagement strategy, such that the assessed

performance is consistent with CRUs expectations, and to ensure that ESBN has sufficient time and

opportunity to change elements of the proposed strategy which do not meet CRU’s expectations.

Regarding assessment, ESBN looks forward to working with CRU to clarify the practical implementation of this

incentive (for example timing of strategy submission, its review and approval, evidence required to

demonstrate performance).

CRU has proposed that an external panel might be best placed to assess performance against this incentive.

Such an approach would be consistent with that adopted in GB. Such a panel should deliver a welcome

perspective as to the expectations and needs of customers. ESBN also notes that the costs associated with

such an assessment should be recoverable through the revenue earned in the incentive.

As such, while CRU has not proposed the revenue structure associated with this incentive, ESBN expects that

this would provide for assessment costs to be recovered subject to any minimum standard being exceeded

such that there is no need or intent to penalise performance. Should CRU fail to allocate incentive revenue to

this mechanism in 2018, an appropriate revenue allowance should be allocated to cover the cost of any

external panel assessment CRU seeks ESBN to obtain.

5.7 Strategic and Innovative Thinking

Strategic and innovative thinking is fundamental to how we develop a system which meets our customers’

needs, to supporting the role of greater electrification in Ireland meeting its renewable energy targets, to

efficiently meeting the challenges of extremely high penetrations of distributed renewable generation on our

networks, and to how we interact with our customers going forward.

ESBN has a history of innovation, and a continued culture of quietly innovating to meet challenges as they

arise. ESBN welcomes CRU’s proposed incentive mechanism as a means of cultivating innovation and

supporting its delivery, underpinned by well communicated strategy objectives, and the systems in place to

ensure effective prioritisation, dissemination and transfer of positive outcomes into business as usual

activities.


Over the period 2016 – 2017 ESBN has developed an Innovation Strategy, which captures all stages of the

innovation cycle, from determining the values which should underpin innovation activities, to their design,

prioritisation, delivery, assessment and where appropriate, transfer into business as usual activities. In parallel

ESBN has continued to deliver innovation projects in the key areas consistent with CRU’s stated objectives.

This has, and continues to, demanded the dedication of resources, creativity and management.

ESBN believes that the approach proposed by CRU, with ESBN’s delivery against this strategy subject to

assessment each year 2018 – 2020 is appropriate. This would provide for CRU to lay out clear assessment

criteria and process expectations in advance of the first assessment. ESBN considers that clarity of such

expectations is important, expects that CRU will allow sufficient time and opportunity for ESBN to change or

improve elements of its innovation activities as required, in line with CRU’s intended assessment process and

criteria.

ESBN notes that the full innovation revenue (€100m) was included in the baseline revenues of the PR4

Decision and revenue model for ESBN. It reflects revenue necessary for ESBN to be able to deliver its

committed performance in PR4, within a challenging set of allowances, and ESBN and CRU’s shared belief that

this challenge can only be met with innovation and new means of efficiently delivering value for our

customers. The contribution of the Strategic Innovation Fund is important to ESBN maintaining the financial

metrics necessary to efficiently access funding to deliver its regulated activities.

As such, the proposal that a penalty of up to €15m may be applied is a cause of concern. This is particularly

the case given our ongoing commitment to delivering strategic innovation, to the benefit of our customers,

supporting Ireland meeting its renewable energy objectives, greater participation of distribution connected

demand and generation in system services, and ensuring the continued efficient and secure operation of the

distribution system.


6 Summary

In conclusion, ESBN welcomes the renewed focus on electricity system performance, and those aspects of how

the system is managed and developed which best reflect customers’ needs, preferences and values.

Many of the proposals offer new and better ways to deliver value, engage with customers, and ensure we can

continue to deliver value for our customers in future. These include the proposal to introduce a customer

engagement incentive (Proposal 17), continued emphasis on customer service and network reliability, and a

new emphasis on simple, accessible and thus more useful information in annual performance reporting,

making it easier to determine the value delivered by the DSO, TAO and TSO. We welcome these proposals and

look forward to delivering on our commitments as reflected in these mechanisms.

With regard to the proposals for a smart metering incentive, we share CRU’s commitment to delivering the

benefits of this project for our customers. Aspects of these proposals could be refined to ensure that the

incentive design is a balanced and reasonable reflection of customers’ expectations, and of the design of the

NSMP.

In addition to welcoming proposals to strengthen the role of distribution system performance reporting in

opening and informing an ongoing dialogue with our customers, we look forward to working with the TSO to

deliver the proposed new transmission system reporting framework.

Finally, strategic and innovative thinking and actions must be reflected in distribution system management and

development. ESBN is, has been and will continue to be absolutely committed to innovating in a manner

which delivers value for our customers, creates new value in how the system is used, supports the

decarbonisation of the energy system, and continues to improve the efficiency and effectiveness of how we

deliver our core activities. The focus on innovation proposed in this consultation reflects CRU’s, ESBN’s and

our customers’ shared expectations and values in this regard.


REFERENCES

[1] Ofgem (2012). Strategy consultation for the RIIO-ED1 electricity distribution price control. Reliability and

Safety. Supplementary annex to RIIO-ED1 overview paper. Reference 122/12

[2] Ofgem (2014). Supplementary annex 1: Draft RIIO-ED1 Fast-track CRC licence changes. (Appendix 2).

[3] NREL (2017). Next-Generation Performance-Based Regulation. Reference NREL/TP-6A50-68512

[4] RAP (2017). Performance Based Regulation Options – White Paper for the Michigan Public Service

Commission. USA: The Regulatory Assistance Project (RAP)

[5] Ofgem (2017). Guide to the RIIO-ED1 electricity distribution price control. London: Ofgem

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