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Price Review Submission covering period

2016 to 2020 (PR4)

Distribution System Operator (DSO)

PR4 Overview (DF01)

Status: Submitted to CER

Date: 21/11/2014

Public Submission Document

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Table of Contents

TABLE OF CONTENTS 01

1. DSO Executive Summary 03

2. DSO Introduction 06

3. DSO PR4 Economic Environment 08

3.1. ESRI’s Medium Term Review 2013-2020 08

3.2. New Connections 08

3.3. Load Forecasting 9

3.4. Inflation 10

4. Affordability 11

5. WACC & Financeability 12

5.1. WACC 12

5.2. Financeability 13

6. DSO Capital Expenditure Programme 15

6.1. Transmission 15

6.2. Smart Metering 16

6.3. Prioritisation of Distribution Capex 16

6.4. New Business 18

6.5. Generator Connections 18

6.6. Line Diversions 19

6.7. Reinforcement 19

6.8. Non Load Related Network Expenditure 21

6.9. Non Network 25

6.10. Electric Vehicles (EVs) & North Atlantic Green Zone Project (NAGZ) 31

7. Operating Expenditure 33

7.1. Operation & Maintenance Costs 33

7.2. Asset Management 34

7.3. Metering 35

7.4. Customer Services 36

7.5. Provision of Data 37

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Table of Contents

7.6. Telecoms 38

7.7. Sustainability and R&D 38

7.8. Rates 38

7.9. Other 39

7.10. Efficiencies 41

7.11. Benchmarking 41

8. Pension Recovery 42

9. Asset Life 43

9.1. Distribution 43

9.2. Transmission 43

10. Climate Adaptation 44

11. Incentives 46

12. Customer 48

13. Safety & Resourcing 51

13.1. Safety Strategy 52

13.2. Work Practices 53

13.3. Resourcing 53

14. DSO Conclusion 55

DSO Appendix 56

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1. DSO Executive Summary

ESB Networks Objectives & Economic Outlook

Despite the significant challenges that faced ESB Networks (ESB Networks) over the PR3 period of 2011 to 2015 due to the severe economic downturn, the business successfully and substantially delivered on its licence obligations and key objectives over the period. Critically, affordability and customer service targets will be maintained as compared to what was anticipated when the determination was set. This was partially achieved by prioritising and deferring delivery of elements of the PR3 infrastructure investment programme. As a result ESB Networks is now well placed to continue to deliver successfully into the period 2016 to 2020 (PR4).

ESB Networks’ high level objectives for PR4 are to :• Continue to deliver a safe and reliable electricity distribution network for our customers and the economy through

delivering key electricity infrastructure. This includes investing to enable renewables integration onto the network facilitating the achievement of the Irish Government RES-E target of 40% of energy consumed in the electricity sector coming from renewable sources

• Ensure safety of staff and the public

• Continue to provide excellent customer service and have due regard to customer affordability

• Lead the development of the Smart Grids /Networks sector in the Republic of Ireland

• Drive efficiencies within ESB Networks to create customer and shareholder benefit.

In contrast to PR3, the economic outlook for the PR4 period is positive. It is anticipated that the economy will return to a reasonable rate of growth driving an increase in new connections and electricity demand.

Delivery of Networks Objectives In PR4:• ESB Networks is proposing a distribution capital expenditure programme of €1.8bn for the PR4 period which ESB

Networks believes is the minimum expenditure required to support the delivery of a safe and reliable distribution system for our customers and the economy. In developing the final programme, ESB Networks was very conscious of the affordability impact on our customers. The PR4 plan is broadly in line with expenditure in the PR3 period with the exception of asset replacement and reinforcement expenditure which was controlled carefully in PR3, resulting in deferral of a large portion of required investment as set out in the historic submissions on Reinforcement and Asset Replacement. The base case submission does not include Smart Metering as the final investment decision has not yet been taken. However, further development and project costs necessary to take the project to the next major milestone in 2017 are included.

• ESB Networks is proposing to progress developments in the smart environment and to implement smart grid technologies and practices as the cornerstone of the networks business into the future.

• ESB Networks is committed to maintaining excellent customer service. ESB Networks is targeting:

» maintaining strong customer satisfaction with service levels at 78%

» Maintaining strong customer satisfaction within the National Customer Care Centre. To meet customers’ needs to engage in more online and via social media, ESB Networks is proposing to put in place a new website to offer additional online services and a dedicated team to deliver services via a range of social media

» Maintaining the reliability of electricity supply for our customers at 2009 levels. This will deliver a 60% improvement in the reliability of customers supply as measured by Customer Minutes Lost between 2001 and 2020

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» Providing critical market services to electricity suppliers in line with service level agreements in areas including customer switching, meter reading, revenue protection services and providing Pay As You Go Meters for electricity customers in financial hardship.

• ESB Networks is fully committed to ensuring the health and safety of our staff, contractors, and the public. There have been 4 work based fatalities in our business in the last 4 years. In response ESB Networks has put in place a strategy to improve safety with the objective of ensuring that we are incident free. Implementation of this safety strategy has the potential to be disruptive to the delivery of our work programme. CER’s support in the delivery of our strategy will enable us to move forward effectively.

• An allowance of €1.5bn in Distribution Opex costs is sought which is €0.4bn greater than the PR3 allowance. In ESB Networks’ view, the maintenance allowance in PR3 was too low particularly with regard to the timber cutting allowance. ESB Networks spent more on maintaining network assets than was allowed despite, in the HV stations area, work completed being less than required and what industry norms would demand. ESB Networks is seeking a higher maintenance allowance in PR4 to ensure assets are appropriately maintained to deliver a safe and reliable distribution system for our customers. Other increases relate to rates increases, increased metering costs associated with the provision of PAYG meters to customers in hardship and increased revenue protection service requirements, improvements in customer service and costs associated with complying with increased safety and environmental legislation and safety related enhancements to work delivery structures safety management systems as well as training and competency assurance.

Financeability Maintaining Networks financial strength is critical to enable ESB Networks to ensure continued, efficient and competitive access to funding markets to enable it to fund the electricity infrastructure and activities necessary to deliver its licence obligations and objectives and to earn an acceptable commercial return for ESB and its shareholders.

The following is ESB Networks’ proposal in relation to some of the main items which significantly contribute to ESB Networks’ financeability:

• ESB Networks is proposing a reduction in the Weighted Average Cost of Capital from 5.2% to 4.98% for the PR4 period on the basis that this is an appropriate return to enable ESB Networks to efficiently and competitively finance its activities. ESB Networks considers that this reduction in the cost of capital is justified by precedent and a broad assessment of the evidence. A reduction of WACC from 5.2% to 4.98% reflects market improvements but retains a long-term focus in mind for PR4 and reflects the considerable risk and uncertainty that still remains for the Irish economy in the medium term. This longer term focus is consistent with various regulatory decisions in the UK within the past five years. It also recognises that the Irish sovereign debt crisis has had a material effect on the cost at which ESB Networks was able to issue debt which will have an overhang effect over PR4.

• ESB Networks is seeking to recover the ESB Networks element (€462m)of the contribution payable by ESB to the ESB Defined Benefit Pension deficit as an additional opex allowance for recovery via regulated charges. Regulatory precedent followed by the CER and many other regulators including Ofgem, Utility Regulator, CAR, CAA, etc. is to allow recovery of deficit funding as incurred, i.e. in the period to 2018, and this indeed is our advisor’s (Oxera) recommendation. However, in the interest of managing price, ESB Networks is proposing recovery over a 13 year period. ESB Networks considers the pension agreement as a key achievement in the PR3 period that protects the customer into the future by reducing the risk profile of the scheme.

• ESB Networks has considered whether the 45 and 50 years asset lives for distribution assets and transmission

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assets is appropriate (transmission included in this document for completeness). Whilst ESB Networks considers that there are strong arguments for seeking recovery of distribution assets over a shorter timeframe, due to affordability concerns, ESB is making no request in this area. However, a core part of the submission is that ESB Networks is seeking recovery on transmission assets over a 45 year life in line with UK DNOs.

As CER is aware in the context of Financeability, Free Funds from Operations (FFO) / net debt is the key metric used by Standard & Poor’s in its credit rating for ESB and as a result ESB Networks. In arriving at an appropriate PR4 revenue proposal, ESB Networks has carefully considered all aspects of the business - the appropriate WACC, an appropriate period for pension recovery and asset lives as well as the opex and capex programme. ESB Networks is strongly of the view that the level of revenue required to enable it to competitively and efficiently finance a sustainable networks business should deliver an FFO/net debt target of 15% in line with UK DNOs.

Customer AffordabilityESB Networks however is acutely aware of the economic pressures customers are under right now and has given significant consideration to affordability in developing this proposal. ESB Networks’ final proposal is set to deliver a flat DUoS price over the 5 year PR4 period. To deliver this end result, ESB Networks has had to accept a trade off between financeability of the business and customer affordability. Whilst ESB Networks considers that delivery of a 15% FFO/net debt is necessary to competitively and efficiently finance the business, ESB Networks accepts that in the interest of affordability, that this target should not be achieved in this regulatory period. ESB Networks’ proposal will deliver an FFO/net debt of 13.4% (12.5% excluding pension).

The resulting PR4 proposition, from a credit rating metrics perspective places ESB Networks towards the lower end of the range for an A rated company. ESB Networks is strongly of the view that an FFO/debt level of 13.4% (12.5% excluding pension) is absolutely critical to enable the business to secure competitive and efficient financing on an ongoing basis, to facilitate the delivery of key infrastructure investment and delivery of our regulatory obligations for the benefit of our customers and the economy. As ESB Networks does not believe that this will be sustainable into the future, ESB Networks would welcome the opportunity to re-consider the higher target in PR5.

As noted above, ESB Networks tempered its pension deficit contribution recovery request, asset life consideration and financeability target as a result of price pressures facing our customers. ESB Networks’ proposal will facilitate holding DUoS prices at current levels in real terms over the five year PR4 period 2016 to 2020 (i.e. enable no DUoS price increase in real terms over PR4).

SummaryIn summary, Networks considers that this proposal for the PR4 period is appropriately balanced to ensure ESB Networks can continue to deliver on its licence obligations to provide a safe and reliable distribution system for our customers and the economy during PR4, whilst maintaining excellent customer service at an affordable price.

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2. DSO Introduction

Despite the challenges over the PR3 period, ESB Networks (ESB Networks) successfully and substantially delivered on its licence obligations and objectives during PR3. Critically, affordability and customer service targets will be maintained in line with anticipated performance when the determination was set. As a result ESB Networks is well placed to continue to deliver successfully into PR4.

ESB Networks’ High Level Objectives for PR4 are to :• Continue to deliver a safe and reliable electricity distribution network for our customers and the economy through

delivering key electricity infrastructure. This includes investing to enable renewables-integration into the network to facilitate the achievement of the Irish Government RES-E target of 40% of energy consumed in the electricity sector coming from renewable sources

• Ensure safety of staff and the public

• Continue to provide excellent customer service and have due regard to customer affordability

• Lead the development of the Smart Grids /Networks sector in the Republic of Ireland

• Drive efficiencies within ESB Networks to create customer and shareholder benefit.

ESB Networks is committed to bringing Ireland’s electricity networks to a world-class standard while also ensuring that the networks can support Ireland’s stretching renewables and sustainability targets. Smart metering, intelligent networks and increased electrification, including electrification of transport and heat, will all play key roles in a very different energy infrastructure of the future. ESB Networks will play a central role in the successful delivery of this infrastructure. The base case submission does not include smart metering as the final investment decision has not yet been taken. However, for completeness, ESB Networks provides sensitivities on all key metrics that reflect the investment proceeding in line with the Smart Metering Cost Benefit Analysis (CBA).

ESB Networks are acutely conscious of the enormous global and national challenge, in terms of environmental and energy sustainability. The strategies and targets emerging to address climate change in terms of CO2 reduction, renewable energy and energy efficiency are stretching. Energy networks, and electricity networks in particular, will be at the heart of their delivery. ESB Networks will play a key enabling role in the integration and penetration of renewable energy sources, deployment of distributed generation, the roll-out of demand side management (DSM) programmes and transport electrification. Over the next five to ten years ESB Networks will need to develop the network to be smarter, more accessible, more flexible and more efficient, while all the time operating them cost-effectively, reliably and safely.

Whilst all efforts have ben made to keep capital investment levels at an affordable level, the capital investment required in PR4 is still significant. Good financial performance, while not the only measure of success, is critical to ESB Networks’ future as a business. ESB Networks has a mandate to earn appropriate commercial returns for ESB and its shareholders, while meeting the challenges of regulation and meeting responsibilities to customers, the electricity market, and the wider national economy and society. To be financially successful in the longer term, ESB Networks must continue to improve business performance in the form of increasingly efficient delivery of services to customers. This will ensure that the rising debt levels facing the business can be supported and customer costs minimised.

In that context, ESB Networks’ objectives for PR4 are :• Hold DUoS charges at 2015 levels in real terms over the five year period of PR4 while continuing to develop and

maintain a safe and reliable network for our customers and the economy• Increased safety levels for members of the public and employees• Address deficiencies such as plant overloading, non-compliance with voltage standards and breaches of safety

standards (short circuit deficiencies)

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2. DSO Introduction

• Replace aging and defective assets that are reaching, or have passed the end of their useful technical life • To maintain and improve network continuity performance and safety• To integrate new technologies and systems which reduce the lifetime cost of assets, and allow for performance

improvement in an informed and effective manner• To maintain excellent customer service cost-effectively delivered across the Customer Service spectrum• The connection of a predicted additional 108,000 new customers as required• Achievement of national renewable energy targets by the connection of significant amounts of renewable

generation capacity to the distribution system within the gate processing system • To enable an improvement in national energy efficiency through the roll out of a smart metering project subject to

CER decision to proceed and through ongoing efficiency and loss reduction measures on the network• To implement smart grid technologies and practices as the cornerstone of the networks business into the future.

This document sets out the key facets of ESB Networks’ proposal.

1. DSO PR4 Economic Environment ESRI in their Medium Term review 2013-2020 consider three possible scenarios or paths for the economy because

of the uncertainty about the future - Recovery, Delayed Adjustment and Stagnation. ESB Networks has taken the Recovery Scenario as a base assumption in developing the PR4 proposal.

1.1. ESRI’s Medium Term Review 2013-2020 DSO PR4 Economic Environment ESRI in their Medium Term review 2013-2020 consider three possible scenarios or paths for the economy because


2. DSO PR4 Economic Environment ESRI in their Medium Term review 2013-2020 consider three possible scenarios or paths for the economy because


2.1. ESRI’s Medium Term Review 2013-2020 ESRI sets out the scenario as follows: (see following page)

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3. DSO PR4 Economic Environment

ESRI in their Medium Term review 2013-2020 consider three possible scenarios or paths for the economy because of the uncertainty about the future - Recovery, Delayed Adjustment and Stagnation. ESB Networks has taken the Recovery Scenario as a base assumption in developing the PR4 proposal.

3.1 ESRI’s Medium Term Review 2013-2020

ESRI sets out the scenario as follows: ‘’In the Recovery scenario, the EU economy is assumed to return to a reasonable rate of growth over the rest of the decade. It is also assumed that the continuing problems in the Irish financial sector are tackled effectively. Under these circumstances, the export sector of the economy would see its markets grow, resulting in increases in output and employment. In turn, growth in foreign demand would help produce a turnaround in domestic demand. As firms increase their sales and their profitability they would need to invest to continue growing. With rising real personal incomes and growth in employment, consumption would also begin growing again.

Demographic pressures would mean that more dwellings would need to be built later in the decade and a recovery in household circumstances would suggest that this investment could in theory, be financed. Overall, this scenario would see growth in GNP of around 3.5 per cent a year in the second half of the decade (Table 1). While the economy would not be likely to reach full employment by 2020, the level of unemployment could be more than halved to around 6 per cent.

Finally, the Irish growth model remains vulnerable to shocks from outside Ireland. As a result, it will be important that the driving force behind the export sector moves gradually away from businesses that are dependent on the low corporate tax regime to businesses that rely on other aspects of Ireland’s competitive advantage.’’ ESRI Summary table:

2013 2014 2015 2016 2017 2018 15-20

Recovery Scenario

GDP, % 1.7 3.0 4.0 4.1 4.2 3.7 4.0

GNP, % 1.2 0.5 4.3 3.6 4.0 3.4 3.6

General Govt. Deficit, % of GDP 7.3 5.0 3.2 1.2 0.4 0.3 1.0

Unemployment Rate, % of Labour Force 14.0 13.4 11.8 10.6 9.5 8.2 5.6

Figure 1: ESRI Summary Table

3.2 New Connections

For 2016 to 2020, the anticipated volume of new connections is expected to grow gradually from the dip of the previous five years (2011-2015) to the levels as predicted in the table below based on increases in population, declining emigration and government support in financing programmes for the construction of social and affordable housing units. 2016 2017 2018 2019 2020

G1 - New housing Schemes 7,000 8,500 9,500 11,500

G2 - Non-scheme Houses 5,500 6,000 6,500 7,000

G3 - Commercial/ Industrial Supplies 4,500 4,500 5,000 5,500

17,000 19,000 21,000 24,000

Figure 2 - Forecasted New Connections

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3.3 Load Forecasting

MethodologyThe essence of load forecasting is to examine the current trends driving growth in demand for electricity, to identify the key factors involved, to determine how these factors are likely to change over the forecast period and to quantify the impact of such changes. The fundamental methodology therefore is to obtain as complete and accurate a description of the existing load composition and behaviour as possible. With this it is possible to identify the key factors driving growth at present and in the immediate past and then to project load growth based on the expected behaviour of these factors over the time period of interest.

Key load information includes the following:

• Sales by customer type (Domestic, Commercial / Institutional and Industrial)

• Customer numbers by type including some breakdown of residential customers by level of consumption

• Load composition - some forms of electricity use can have significant growth potential in an expanding economy, e.g. air conditioning, while others are subject to reducing demand due to technology / efficiency improvements, e.g. lighting – fluorescents, compact fluorescents (CFLs), etc

• Economic performance - mainly measured by Gross Domestic Product (GDP) and its composition across the major sectors of the economy. Inflation is also relevant and is measured to Consumer Price Index (CPI)

• Electricity price / tariff data is needed to assess the impact of price changes on consumption

• Population data - information is needed on population growth and major population movements, e.g. from rural to urban locations

• Technology - changes in end use applications and appliances. For example more widespread use of air conditioners could increase demand significantly, while the use of more energy efficient motors, lighting, etc. can reduce demand

• Weather - changes in average seasonal temperatures.

Analysis & ResultsFollowing analysis of all constituents above, the following trends were noted:

• System demand has started to show signs of recovery

• Average consumption per customer on residential side has been broadly unchanged through the recession; reduction in demand driven instead by the reduction in the number of houses

• Economic growth (GDP ) returning from 2012 onwards

• Housing construction continued to fall through 2013 but this trend is expected to reverse over time with a forecast of annual new connections of 27,000 in 2020.

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3.3 Load Forecasting

The overall forecast based on this analysis is that distribution sales are anticipated to gradually increase over the PR4 period. This is exhibited in the graph below:

35,000

■ Adjustments■ 110kV Network■ 38kV Tailed■ 38kV Looped■ MV■ LV MD■ LV Non MD■ Public Light, Misc.■ Rural Domestic■ Urban Domestic

30,000

25,000

20,000

15,000

10,000

5,000

0

2013 2014 2015 2016 2017 2018 2019 2020

Figure 3: Distribution Sales Forecast

The overall impact is a 25% increase in sales between 2015 and 2020. It should be noted that a significant portion of this increase is driven by the major new loads forecast (but not confirmed) to connect over the period. Excluding these loads, the normalised cumulative growth over the period is closer to 10%.

3.4 Inflation In PR1 (2001 to 2005) and PR2 (2006 to 2010) the CER used CPI as the index to inflate revenue. During the PR3 review process the issue arose as to whether CPI or HICP would be more appropriate to use. This was mostly driven by the fact that CPI (which includes mortgage interest and house prices) was more volatile during a period with exceptional economic conditions. As a result, CER moved to using HICP for PR3.

Low inflation is a significant risk to ESB Networks due to the fact that revenues are indexed. Added to this is the fact that debt bears a fixed interest rate which further increases downside risk. Prolonged low inflation can ultimately impact cashflow and hence credit ratings.

Moody’s in particular have highlighted low inflation as a particular risk to ESB Networks. In its commentary “Low Inflation is Credit Negative but Exposure Varies by Regulatory Framework” issued in April 2014, it states that regulated energy network issuers in France, Ireland, Italy and the Netherlands are most affected by low inflation because their asset base will fall in value, increasing leverage. The report goes on to say that the mechanism for allowing revenue becomes very significant in low inflation environments because of the risk of fixed debt payments and fixed staff costs for entities that earn a real return. Regulated entities subject to a nominal return are much more protected because the allowed regulatory return and the value of the RAB will stay at the same level, thus protecting cash flows and debt serviceability.

ESB Networks is therefore very exposed from a credit rating / financeability perspective by virtue of the fact of having a real WACC and fixed debt servicing costs. For this reason ESB Networks propose reverting to CPI as the indexation factor for PR4. This is consistent with RIIO-ED1 which continued the use of RPI by Ofgem.

ESB Networks is using the following indexation assumption in projecting revenues for the PR4 period.

2016 2017 2018 2019 2020

Annual CPI Rate 1.50% 1.50% 1.50% 1.50% 1.50%

Cumulative CPI Rate 1.0252 1.0405 1.0561 1.0720 1.0881

Figure 4: CPI Assumption table

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4. Affordability

Affordability has been a key consideration for ESB Networks in the PR3 mid term WAAC review and in developing its PR4 proposal. Key areas of focus have been:

• Prioritisation of infrastructure investment expenditure for the PR4 period. This is covered further in Section 6 of this submission

• A proposed WACC reduction for the period from 5.2% to 4.98%

• Efficiency savings of 1% per annum of non-controllable opex are taken into account within the numbers i.e. 5% cumulative over PR4

• Instead of seeking pension deficit recovery over the period 2016-2018 as regulatory precedent would indicate, ESB Networks is seeking recovery over 13 years

• Although ESB Networks considers that ESB Networks, as with comparable DNOs, should deliver an FFO/net debt performance of 15%, ESB Networks accepts that there is a trade off with customer affordability and than that, in this context, it is not possible in this price review period and is seeking more a moderate revenue stream

• Although ESB Networks considers that ESB Networks should be recovering investment on distribution asset over a shorter lifetime than the UK DNOs, ESB Networks is seeking no change in this respect.

The Average Unit Price (AUP) impact of ESB Networks’ PR4 submission is as set out below:

Parameter Base Case Smart Metering Sensitivity

DUoS Revenue €3.5bn €3.7bn

AUP % increase 0% 8.8%

Impact of DUoS on end user 0% 2.1%

Figure 5: Average Unit Price (AUP) impact of ESB Networks’ PR4 submission

See further detail on DUoS revenue and AUP in Appendix 1. ESB Networks’ proposal will facilitate holding DUoS prices at current levels in real terms over the five year PR4 period 2016 to 2020 (i.e. enable no DUOS price increase in real terms over PR4).

ESB Networks considers that this price review proposal delivers excellent value to the customer at a time when affordability is an issue.

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5. WACC & Financeability

5.1 WACCRecent European regulatory precedent has seen a decline in allowed returns for regulated utilities. This is concerning as Eurelectric research shows that lower returns result in lower investment. ESB Networks believes that it is critical that the business earns an adequate return over the PR4 period to ensure that revenues are maintained at a level that will attract debt investment. Both the distribution and transmission systems are in need of significant investment over the period 2016-2020.

ESB Networks has engaged Frontier Economics (Frontier) to carry out an independent assessment of the appropriate level of allowed WACC for PR4 to enable ESB Networks to efficiently and competitively finance its activities. On Frontier’s advice ESB Networks is proposing a reduction in the Weighted Average Cost of Capital from 5.2% to 4.98% for the PR4 period on the basis that that this is an appropriate return to enable ESB Networks to efficiently and competitively finance its activities.

The WACC components for the 4.98% proposal are summarised in the following table:

Mid-Term Review Estimate for ESB Networks PR4

Gearing 55% 55%

Risk-free rate 2% 2%

Debt premium 2.2% 1.75%

Cost of debt 4.2% 3.75%

ERP 5% 4.6%

Asset beta 0.3 0.36

Equity beta 0.67 0.8

Cost of equity (post-tax) 5.35% 5.68%

Corporate tax 12.5% 12.5%

Cost of equity (pre-tax) 6.1% 6.49%

WACC (pre-tax) 5.05% (5.2% with aiming up) 4.98%

Figure 6: Weighted Average Cost of Capital Components

ESB Networks considers that a reduction in the cost of capital is justified by precedent and a broad assessment of the evidence. The reduction proposed reflects market improvements but does not, in determination of appropriate WACC parameters, follow that market to the all time low levels evidenced right now. It is important to have a long-term focus in mind for PR4 and as a result we consider that the CER should take a cautious approach in any downward adjustment as considerable risk and uncertainty still remains for the Irish economy in the medium term. This longer term focus is consistent with various regulatory decisions in the UK within the past five years. It also recognises that the Irish sovereign debt crisis has had a material effect on the cost at which ESB Networks was able to issue debt which will have an overhang effect over PR4.

ESB Networks believes that this balance will provide important clarity and consistency to debt investors at a time when economic conditions remain weak and future prospects remain uncertain across the Eurozone. This may be expected to increase investor confidence and ultimately lower the cost of capital in future to the benefit of customers.

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5.2 Financeability

CER has an obligation to ensure that ESB Networks is capable of financing its operations. The CER has interpreted this clause such that the obligation is to ensure that an efficient licence holder is capable of financing its activities.

Rationale for Targeting a Strong, Investment-Grade Credit RatingIt is imperative that ESB Networks achieves a strong, investment-credit rating to ensure continued access to funding markets. The reasoning behind this is as follows:

a) ESB Networks has significant funding requirements as it is consistently in a cash-negative situation due to its long term electricity infrastructure investment programme. The business has larger capex programmes than most peers relative to size of company which is currently predominantly driven by transmission spend. In addition, approx. €2.5bn of ESB debt is maturing during the PR4 period.

b) As a state-owned entity, ESB is entirely dependent on debt markets for funding. If markets are not available to raise cash, without action, available funds would run out and capex would have to be constrained (as in 2011).

c) ESB (and by extension, ESB Networks) competes for capital from the same investor pool as its UK and European peers. The majority of ESB Networks peers are rated at BBB+/Baa and above, however for a number of reasons ESB could be perceived as a more risky credit. These reasons are as follows:

• ESB Networks is inextricably linked to the Irish economy both by virtue of being state-owned and because of the geographic focus of the business. During the recent economic crisis ESB’s rating (and ESB Networks’ rating were it rated) was constrained by the Irish sovereign credit rating and financial markets were effectively closed to ESB at this time. Although this risk has receded somewhat over the last 18 months, it is still a consideration for investors, who see Irish credits as more risky than UK peer credits, for example.

• The majority of ESB Networks’ peers have access to equity, either through being listed companies or through shareholders which are willing to commit capital. The ability to raise equity, or to retain cash within the business through reducing dividends allows companies to maintain credit quality, however these options are not open to ESB. In investors’ eyes, therefore, there are fewer sources of funds open to ESB to service debt. ESB therefore needs to be perceived as a stronger credit than its listed peers in order to offset this risk.

d) ESB Networks’ advisors have indicated that a strong investment grade rating is essential to refinance maturing debt and to raise funding for additional capital expenditure at optimal rates. Bond yields have been volatile over the years of the financial crisis and investors will expect to see certainty on credit ratings over the medium term prior to committing to purchasing long-dated bonds. Higher interest costs, shorter maturities and onerous financial covenants could result if a lower credit rating is received.

Appropriate Target Credit Rating Metrics for ESB NetworksESB Networks has carefully considered financeabiity and has determined that the appropriate rating for a stand alone networks company situated in Ireland would be an A- /A3 rating from S&P and Moodys respectively to ensure Financeability on an ongoing basis. This rating is required to protect ESB Networks against the Irish sovereign credit risk premium and ensure consistent access to funding throughout PR4.

In the context of Financeability, Free Funds from Operations (FFO) / net debt is the key metric used by Standard & Poor’s in its credit rating for ESB and as a result ESB Networks. Having considered all of the evidence, ESB Networks believes that an appropriate FFO/Net debt target for ESB Networks for PR4 is 15%. This level of performance is in line with the UK DNOs (rated BBB+ / Baa) and ensures that ESB Networks can maintain a level of headroom over the target that Standard & Poors sets for an A rated entity (13%). This headroom is consistent with all UK DNOs and Rating agency practice.

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5.2 Financeability

Having considered the still relatively low levels of growth anticipated over PR4 and having due regard for customer affordability, ESB Networks considers that this is this FFO/Debt target of 15% should not be achieved in this regulatory period. The overall proposal will deliver an FFO/net debt of 13.4% (12.5% excluding pension). The resulting PR4 proposition, from a metrics position places ESB Networks towards the lower end of the range for an A rated company. As ESB Networks does not believe that this will be sustainable into the future, ESB Networks would welcome the opportunity to re-consider the higher target in PR5.

The key credit rating metrics resulting from ESB Networks’ proposal are as follows:

PR4 Submission Sensitivity with Smart Metering

FFO/debt 12.5% 12.3%

FFO/Interest 3.2%X 3.2%

Net Debt/RAV 52.7% 54.2%

Figure 7: Key credit rating metrics resulting from ESB Networks’ proposal

ESB Networks is strongly of the view that for PR4 this 13.4% (12.5% excluding pension) FFO/debt level is the minimum performance required that will enable the business to secure financing competitively and efficiently to facilitate the delivery of key infrastructure investment and ESB Networks’ regulatory obligations in PR4.

Further detail on this area is set out in a separate submission, DF57 WACC & Financeability.

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6. DSO Capital Expenditure Programme

ESB Networks is proposing a capital spend for PR4 that is broadly in line with PR3 with the exception of asset replacement. The following summarises ESB Networks’ planned capital expenditure (before capital contributions) for the price review:

PR4 Projected (2014 real) PR3 Projected (nominal)

New Business 305 229

Generation Connections 109 87

Line Diversions 92 52

Distribution Reinforcement 318 321

Asset Replacement 596 392

NAGZ 88 -

IT, Telecoms, Fleet & Premises 172 103

Smart Metering 23 15

Dismantling 71 53

Total Distribution 1,774 1,252

Transmission * 1,239 1,048

Total 3,013 2,300

* Transmission CAPEX is included for completeness

Figure 8: DSO Capital Expenditure Programme

Capital contributions from distribution and transmission customers are estimated to be €214m and €116m respectively.

Distribution capex is forecast to be €1.77bn compared to a final outturn for PR3 of €1.25bn. The main elements of the increase are due to the following reasons:

• €0.1bn as a result of increased new connections and associated line diversions due to pick up in the economy. This is largely outside of the control of ESB Networks and may increase or decrease based on customer behaviour

• €0.3bn in Asset Replacement to meet the required investment that was deferred during PR3

• €0.1bn Non-network investment to meet the systems requirements that were deferred during PR3.

6.1 TransmissionAs noted above, the transmission capex is included for completeness of the capital expenditure. This expenditure is driven by EirGrid and a separate submission TF01 Transmission Capex Overview sets out this expenditure in more detail from the TAO perspective.

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6.2 Smart Metering

As mentioned in the introduction, the base case PR4 submission does not include the full Smart Metering capex as the decision to proceed has not yet been taken. The next phase of the National Smart Metering Program (NSMP) involves :

• Designing the regulatory framework to support policy decisions

• Designing the changes to the retail market to support implementation of policy decisions

• Designing the approach to timing and sequencing of delivery of decisions

• Launch of ESB Networks procurement of the high cost products and services, once sufficient information is made available.

ESB Networks will not award any contracts from this procurement process or proceed with full roll out as it is the intention of CER to reassess the case for smart metering at that point, before the CER go/no go decision.

ESB Networks estimates that the cost of this next phase of work which will be completed in Q2 2017 at a cost in PR4 of €23m. As per the current Cost Benefit Analysis (CBA) the expected capital spend on smart metering in the 2016-2020 period is €798m.

6.3 Prioritisation of Distribution CapexIn developing the final programme, ESB Networks was very conscious of the affordability impact of PR4 plans, particularly in relation to the larger asset replacement and reinforcement programmes. As a result, a number of steps were taken to reach the final programme:

1. An initial assessment of required expenditure was carried out (Safety, Reliability, Policy & Environment)

2. A Risk & Cost Benefit analysis was carried out on each element of the Asset Replacement programme

3. An independent high level review of initial assessment was commissioned

4. An independent unit cost benchmarking was commissioned.

Step 1: Initial AssessmentESB Networks set out all proposed programmes on a prioritised basis. The following categories were used:

Priority Programmes

Mandatory • New Connections

• Response CAPEX

Priority 1 Safety driven programmes

• Plan to keep safety risks at a level that is in line with UK DNOS and European DSOs

Priority 2 Security of Supply Driven Programmes

• Expenditure mainly driven by requirement to meet planning standards

• Based on forecast loads adjusted for SMART metering impact

• Include also “Elevated” N - 2 Risks

Priority 3 Renewal CAPEX

• Programmes that reduce risk and improve continuity

Figure 9: Prioritisation of Distribution Capex

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6.3 Prioritisation of Distribution Capex

Step 2 Risk & Cost Benefit AnalysisAll proposed programmes were then considered from a risk and cost benefit perspective using a methodology developed with EA Technology as part of the PR3 process. This is a similar method to that used by DNOs in GB and elsewhere. The following formula is applied:

Benefit (∆ Risk , ∆Cost)

Cost

Where Risk = Probability of Failure / Event X Consequence f ( s, r, c, e )

s = Safety

r = Continuity of Supply

c = Cost

e = Environment

Each programme was essentially considered in context of ways the asset could fail and the impact of those failures. A lower programme of work developed following this process.

Step 3 Independent High Level Review of Initial Assessment ESB Networks requested Parsons Brinckerhoff (PB) to consider and review the strategies, policies and practices adopted in assessment of load related and renewal expenditure forecasts for the PR4 period by comparison with GB DNO practices.

The review concluded that expenditure planned is broadly in line with that of UK DNOs. The following extracts from the report support this:

• ‘An initial ‘order of magnitude’ benchmarking assessment against DNO companies with similar customer numbers or line length shows that this sum is of the right order of magnitude if not low.’

• ‘The basis of the forecast is sound and is unlikely to lead to stranded network capacity. If anything it exposes ESB network to a level of risk since load growth will undoubtedly take place and there may be little benefit gained for some time from the introduction of SMART metering or from legislation intended to introduce efficiency initiatives’ .

• ‘Bearing in mind that the submission as a whole appears low and since the load related content of the submission is proportionally high compared to the ratio of DNO load related expenditure to asset replacement expenditure, there appears to be prima facie evidence that the asset replacement expenditure has already been minimised’.

The review has given ESB Networks significant confidence that the programme proposed is in line with peers, is unlikely to result in stranded assets and is investing in asset replacement at a level that is adequate yet affordable.

Step 4 Independent Unit Cost BenchmarkingResults to date from unit cost benchmarking indicates that ESB Networks’ construction costs are well within comparable DNO costs for lines and cables and comparable with equivalent DNO’s costs for substations.

Expenditure in this area is expected to rise from a forecast of €229m in PR3 to €305m in PR4. The PR4 period is expected to see modest customer growth. For 2016 to 2020, the anticipated volume of new connections is expected to grow gradually

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6.4 New Business

from the dip of the previous five years (2011-2015) to the levels as predicted in the table below based on increases in population, declining emigration and Government support in financing programmes for the construction of social and affordable housing units.

2016 2017 2018 2019 2020

G1 - New housing Schemes 7,000 8,500 9,500 11,500 13,500

G2 - Non-scheme Houses 5,500 6,000 6,500 7,000 7,500

G3 - Commercial/ Industrial Supplies 4,500 4,500 5,000 5,500 6,000

17,000 19,000 21,000 24,000 27,000

Figure 10: New BusinessForecast PR4

Supply of new housing (G1 & G2 connections, especially in regions around the greater Dublin area, is short and prices are beginning to rise. ESB Networks expects to see a rise in completions in the forthcoming PR4 period due to this correlation. The significance of this rise is expected to be modest as the current rates of price rises are believed to be unsustainable, therefore, dampening the supply growth levels.

Non-Domestic connections cover a wide variety of types of connections. Therefore, it is more difficult to link/correlate these new connections to external factors such as house prices. It is forecast that these G3 connections are likely to remain at approximately 5,500 for the duration of PR4.

See DF05 New Connections for further detail.

6.5 Generator ConnectionsThe PR4 period covering years 2016-2020, will cover the majority of the construction of the Gate 3 projects that have contracted in mid-2013, and the remainder of the Gate 2 projects which have not connected to date.

A projected renewable generation capacity of 1,250MW has been estimated to be connected to the distribution system in this 5 year time period. This is less than the current level of contracted generation, as it is generally expected and acknowledged that not all the contracted Gate 2 and Gate 3 connections will progress through to connection, for various reasons. Currently, ESB Networks’ best estimate of renewables that will connect to the distribution system is as follows

Distribution Connected

PR2 600

PR3 1200

PR4 1250

3,050

Figure 11: Generator Connections Forecast PR4

ESB’s estimate of capital expenditure in this area for the PR4 period is €109m. Given the expectations of receipts towards the close of PR3 to meet the REFIT deadline, it is driving most of the PR4 expenditure into the early years with almost 75% (€82m) of the total amount forecast to be incurred in the first two years (2016 and 2017), and the remaining 25% (€27m) spread out over the latter three years as further projects progress to completion.

ESB Networks provides non-chargeable line diversions for customers in return for use of land, whereby if the customer

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6.6 Line Diversions

decides to develop his or her land, line diversions are carried out at no charge to the customer. Therefore, line diversions are strongly correlated to land development or “New Demand Connections” .

In PR3 the sum allowed for line diversions was based on 11.4% of the cost of New Demand Connections whilst the outturn is forecast to be 22%. This rising percentage is due to the fact that there is a portion of line diversions that arise from developments not needing a new connection, e.g. farm sheds. With new connections being at a such a low level, these now represent a higher proportion of the line diversion cost.

The Line Diversions forecast of €92m has been based on a long term historical performance from 2006 to 2013. This long term approach has been taken due to the recent variance in the PR3 period. Based on these recent lower outliers in PR3, an objective method of determining a true reflection of the forecast costs is to apply a linear trend to the average of all costs from the PR2 and PR3 periods inclusive. Further detail on this proposal can be found in DF28 Line Diversions.

6.7 ReinforcementPR4 Proposal PR3 Forecast

HV Reinforcement €252m €227m

MVLV System Improvements €41m €34m

20kV Conversion €25m €60m

Total Reinforcements €318m €321m

Figure 12: Reinforcement PR4 & PR3

HV ReinforcementTwo major studies have been carried out by ESB Networks to identify the HV load related investments required over the next ten years, i.e. the National HV Network Investment Plan and the Dublin HV Investment Plan. These documents set out in a very detailed way how the 110kV and 38kV Distribution Networks will need to be reinforced in order to bring these networks within Distribution Planning Standards.

The Network load related reinforcements that have been proposed for delivery during the PR4 period are based on a zero cumulative load growth forecast for peak demand from 2013 -2020. Although there is uncertainty in relation to the timing of Smart Metering roll-out, the submission has been further refined to take account of the introduction of Smart Meters which is expected to reduce the contribution of domestic load to system peak by 8%. On the basis that domestic load comprises approximately 50% of the total load the total peak is expected to be reduced by 4%.

Following an increase in electricity consumption of 70% between 1995 and 2010, demand electricity reduced by 3% in 2011 to 2013. In this context even though there has been significant expenditure on the networks over the three previous price reviews, there are still deficiencies on the network. These are present due to the high load growth that occurred since the early nineties through to the second half of the last decade when the economy went into recession. The level of investment in the Distribution Networks during the nineties was minimal when the principal objective during that pre-regulation period was to contain the price of electricity while ensuring that there was adequate generation capacity available.

The PR4 programme will address deficiencies such as plant overloading, non-compliance with voltage standards and

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6.7 Reinforcement

breaches of safety standards (short circuit deficiencies). A programme of network reinforcements is proposed to address these breaches of planning and safety criteria and includes:

• Provision of additional 110kV, 38kV and MV and LV circuits

• Development of new 110/38kV, 110kV/MV, 38kV/MV or MV/LV Substations

• Installation of 110kV and 38kV and MV/LV transformer capacity.

The planned expenditure programme is as follows:

Voltage PR4 Submission €m PR3 Expected Spend €m

110kV 165.6 142.7

38kV 85.9 84.4

MV/LV 40.9 33.5

Total 292.4 260.6

Figure 13: HV reinforcement forecast spend

The increase in the projected expenditure on 110kV reinforcements in PR4 over the expected expenditure in PR3 reflects the deferral of projects in the last price review. Examples include new 110kV substations to replace existing overloaded 38kV substations or to provide relief to the existing 38kV Network. The projected level of expenditure on 38kV reinforcements in PR4 reflects the reduction in the numbers of overloaded 38kV Substations but provides for the uprating of those substations that remain overloaded. There has been significant reduction in MV/LV expenditure over the past three price reviews, reducing from €139m in PR1 to a projected expenditure of €40.8m in PR4.

MVLV System ImprovementsMV/LV network reinforcements are carried out to address deficiencies that arise on any part of the MV or LV network. The work carried out under this programme is response in nature, driven by growth in the networks where network is overloaded, voltage needs to be improved and protection systems upgraded.

While other programmes for asset replacement or capital work on the medium and low voltage networks deal with specific concerns on these networks such as the replacement of MV switchgear or the LV renewal programme, the MV/LV Network reinforcement budget addresses the operational performance of the MV and LV network in the area of continuity and voltage. The programme is comprised of a large volume of small individual jobs.

20kV Conversion20kV conversion is the optimum and most effective means of addressing the major voltage problems associated with long rural networks but also provides significant additional capacity and strengthening of local rural networks without the requirement for HV Substation reinforcement.

Significant progress has been made on the conversion of the rural 10kV overhead networks to 20kV operation. By the end of PR3 47,000km of MV Networks will have been converted to 20kV operation which represents 57% of the total length of MV Overheard Network. For PR4 it is proposed to convert a further 4,000km to 20kV operation at a cost of €25.3m. These proposals are being driven by the need to address significant voltage issues on the identified networks.

ESB Networks has adopted a clear and focussed strategy in developing its asset renewal plan for the period 2016 – 2020.

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6.8 Non Load Related Network Expenditure

This enshrines the safety of our assets, in their reliability when staff are called upon to operate or work on them, and in the exposure of the public to this extensive system which reaches right onto streets and into homes across the country. The capital plan presented has been distilled to the works which are considered absolutely necessary if safety is to be maintained, with a small number of other works included either to meet legal and environmental obligations, or where they are deemed fundamental to security of supply in critical locations. The complimentary body of maintenance interventions planned are necessary to ensure that the existing assets, old and new, continue to deliver a reliable supply and that their associated safety and other risks are contained.

This plan was developed by the asset management experts in ESB Networks, in conjunction with the delivery and operational organisations who come into daily contact with these assets and whose safety relies on their integrity. Through extensive assessments, sampling and testing, intra organisational debate, and consultation with experts, the risks associated with our assets were identified and quantified, and a range of activities proposed. Subsequently these activities were scrutinised in the context of their necessity to maintaining safety. Only the programmes strictly required to maintain safety to an acceptable level were retained for presentation in this plan, with the exception of a small number of programmes where there are particularly critical issues of environmental impact or security of supply which must be addressed.

The table below sets out the Asset Replacement programme for PR4:

Programme PR4 Proposal 2014 real €m PR3 Forecast €m (nominal)

HV Stations asset replacement 126.4m 69.7m

HV cables asset replacement 24.6m 6.9m

HV overhead lines renewal 46.5m 15.3m

MV Substations replacement and refurbishment 23.3m 29.0m

MV cables replacement s 0.2m 1.8m

MV Overhead Lines refurbishment 131.9m 61.9m

LV Cables and minipillars replacements 16.2m 6.0m

LV Urban lines renewal 46.4m 34.6m

LV Rural overhead networks renewal 74.7m 91.5m

Cutout replacements 14.3m 4.1m

Meters & time switches 14.1m

Response capex 51.4m 53.5m

Continuity 13.5m 13.8m

System Control 12.9m 4.0

Total 596.4m 392.1m

Figure 12: Asset Replacement programme for PR4

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HV Stations Asset Replacement

Specific projects contributing significantly to this overall cost of €126.4m are as follows:

• €11.5m Replacement of components with type defects and deficiencies including Reyrolle Type ‘C’ bulk oil switchgear, Sprecher & Schuh 38kV switchgear, porcelain support insulator on a 38kV ASEA disconnect, Kyle Cooper LBFM switches, Oil filled Balteau current transformers at 38 kV and 110 kV.

• €24.0m HV Substation Security including the installation of CCTV, power fencing, palisade fencing, locks with programmable keys is intended to address the high number of costly and dangerous incidents of theft from HV stations which occurs each year. It is hoped that these measures will allow ESB Networks control the cost and hazards arising.

• €6.4m in Environmental Activities including continued bunding activities, flood protection measures at stations which are in known flood risk locations, air quality monitoring and the development of a storage facility for oil filled equipment.

• €1.0m of Condition monitoring in conjunction with a significant shift towards condition monitoring in HV Stations maintenance, a modest investment in condition monitoring equipment for circuit breakers and transformers.

• €9.9m Siemens Stations to complete this programme.

• €5m to replace Convoy Wood Pole 38kV station.

• €21.5m Switchgear replacements at four critical substations.

• €8.6m Replacement of aging 38kV & 10kV Circuit Breakers.

HV Cable Replacements

The main programmes of work in this area at a proposed cost of €24.6m are as follows:

• €0.8m Replacement of Pfisterer 110kV terminations following three catastrophic failures of 110kV cable terminations that occurred in 2011, 2012 and 2013, with the expulsion of debris up to 30m from the installations.

• €0.8m for Replacement of 5 fluid filled indoor cable terminations. Although relatively infrequent, with 2 catastrophic failures recorded in the past 15 years, the failure of fluid filled cable terminations is an exceptionally dangerous occurrence, associated with explosion and fire in the enclosed environment of an indoor substation.

• €12.6m for Replacement of fluid filled cables - The replacement of 8.9km of 110kV gas compression cables, 5.7km of 110kV fluid filled cables and4km of 38kV fluid filled cables is being undertaken, primarily driven by concerns as to the environmental impact of 40,000L of fluid lost into the ground each year.

• €2.2m Adoption of PFT technology to address cable fluid leaks to address high level of oil leakage as compared to peers.

HV Overhead Lines

The main programmes of work in this area at a proposed cost of €46.5m are as follows:

• €29.4m 38kV overhead line refurbishment - over a period of 9 years it is necessary to complete a programme of inspection and refurbishment of the >5,700km of 38kV overhead network.

• €16.4m Refurbishment Program for 4 110kV DSO Double Circuit Lines in Dublin.

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MV Substation Refurbishment and Replacements The main programmes of work in this area at a proposed cost of €23.3m are as follows:

• €10.4m Replacement of Magnefix cast resin RMUs - In a period of just over 1 year, 16 spontaneous failure of Magnefix switchgear occurred. These incidents were all of a serious nature, though serious injury was avoided by virtue of no member of staff having been present at the time. A strategy of incremental replacement is being adopted, with 18 – 20% of the population replaced in PR4.

• €5.2m to complete removal of MV oil filled and open cubicle switchgear.

• €3.2m Completion of Removal of URD substations and associated LV vaults.

MV Cable Replacements It is proposed that MV cable replacements will be undertaken on a reactive basis.

MV Overhead Line RenewalIt is proposed that €131.9 be incurred on MV Cyclical Refurbishment in PR4. The programme of cyclical refurbishment introduced in PR3, originally on a 9 year cycle, is being continued, though on a 12 year cycle. This programme of detailed inspection and refurbishment works addresses a wide range of defects, of which the most immediate concern is premature rot of Scantrepo poles.

LV Cables and Minipillar ReplacementsDuring PR3, work was undertaken to develop an informed and considered strategy to address the risks associated with aging minipillars. The most concerning problem identified is corrosion of the door from the inside. This defect has increased in the last two years. There were 15 reported near misses with mini-pillars in 2013. Informed by a survey of minipillars in a coastal location, it was determined that a programme of replacement should be undertaken. In PR4 a €16.2m programme will target the replacement of 2,200 minipillars (just 1.3% of the total population in 2014) and the replacement of a further 1,000 minipillar doors.

LV Rural Overhead Networks RenewalIn PR4 a programme of €74.7m is planned. This programme of refurbishment of rural LV overhead lines will address the 15,000 bare conductor groups which have not been subject to NRP (1996 – 2002) or the PR2 or PR3 programmes of refurbishment. These works address a wide range of staff and public safety hazards, including pole rot, replacement of wooded cross-arms, steel earths and other defective components, raising ground clearances, faulty fuses, loose connections and the various conditions presenting on networks which will be 50 years or older by 2020 and which were not subject to any manner of maintenance for a significant portion of their service life.

LV Urban Overhead Networks RenewalUrban LV lines present particular hazards given their proximity to higher population densities. Each year almost 2,000 public safety hazards are identified, including badly damaged or broken earth guards, broken or badly corroded headgear, and dangerous timber or pole condition. It is proposed that the programme of refurbishment undertaken in PR2 and PR3 be continued in PR4, albeit at a lower volume of 14,000 spans at a cost of €46.4m, such that by the end of PR4, all pre-1960s networks will have been refurbished.

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Cutout ReplacementsUntil the late 1970’s cut-outs were installed inside premises in hallways, porches, kitchens and under stairs in domestic premises. There is very little clearance (<10mm) between the neutral breakout and the phase-in terminal, which can lead to flashovers between the live busbar and the neutral strands. This, or even simple overheating of the unit poses a risk of fire in customers’ homes. It is proposed that the programme initiated in PR2 and continued in PR3, where cutouts are visited and replaced where deemed not fit for purpose, be continued in PR4 at a cost of €14.3m.

Planned Meter and Time Switch Replacement No planned meter replacements (other than fault replacements) have been undertaken in the recent past so as to avoid any stranding of assets or duplication of costs should smart metering be introduced. This policy remains in place for the majority of domestic meters installed which will see meter replacements if smart metering proceeds. However a growing portion of the existing population of profile meters installed in commercial premises or high consumption domestic properties, which are past their functional life, are slowing or stopping completely. These meters require urgent replacement. In addition to this, a number of capital programmes driven by regulatory obligations – including load research, the provision of profile meters for large energy uses, and the installation of power quality meters – must be completed. This programme will cost €14.1m.

As we have not invested in meter replacement during PR3, there is a body of meters expected to fail during PR4. A significant volume of meters are known to be past their design life, and manufacturer advice and technical experience indicate almost certain total failure for a subset of these. Without delivery of this replacement programme, the cost of fault maintenance and reactive capex would increase by at least €6.2m in meter replacements. On the basis of their replacement being planned for delivery in PR4, this cost is not included in maintenance cost for PR4.

Response CapexResponse CAPEX is capital expenditure initiated by events or external parties. This classification of CAPEX covers resolution of voltage complaints, undergrounding of MV/LV and 38kV overhead lines to facilitate development, replacement of HV/MV/LV plant damaged by fault, replacement of defective meters and time-switches, replacement of fault-prone UG cables and OH conductors, installation of ducts during development for future use, etc. The more significant elements of expenditure are as follows:

• It is anticipated that €14.2m will be incurred in voltage complaint resolution in the 2016 to 2020 period based on the average number of validated voltage complaints received per annum in the 2011 to 2013 period. That projected level takes into consideration the continued roll-out of the 20kV conversion programme and the planned LV Refurbishment Programme.

• A forecast of €4.2m considered reasonable for Replacement of Fault-Prone Corroded Overhead Conductor. It is likely that increased levels of failure will be due to corrosion over the PR4 period.

• The reactive undergrounding of network as a result of third party requests accounts is anticipated to make up approximately €6.6m of the total response-type work carried out by ESB Networks in PR4.

• €18.4m is budgeted for Capitalised Replacement of Plant damaged during Faults the period 2016-2020 based on costs incurred in recent years.

• A provision of €2.9m is being made for expenditure for replacement of fault-prone sections of mainly MV cable over the 5-year period 2016 – 2020.

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ContinuityThe period of PR3 to date has shown very volatile continuity outturn, with very benign years in 2011 and 2012, a return to pre-PR3 levels in 2013 and particularly high outturn of interruptions in 2014, due in part to Storm Darwin in February 2014. This experience has proved valuable to ESB Networks in informing as to the relative value of different investments in managing continuity. This is reflected in the initiatives being proposed for PR4.

The following programmes are proposed for completion during PR4, intended to address a range of issues which would otherwise likely result in increases in interruptions and customer minutes lost over the period of PR4. A range of challenges are already presenting and are anticipated to become increasingly prevalent over this period, including volatile, stormy weather as may arise of climate change, a loss of legacy local knowledge with the natural loss of older staff, ongoing conversions to 20kV of MV networks, changes of earth fault treatment for safety purposes.

• It is proposed that 250 devices be installed in loop automation schemes during PR4. This would allow for approximately 50 schemes to be put in place over the 5 years. The total cost of this programme is €8.5m and the resultant benefit is 0.1 interruptions per customer and 4.9 minutes per customer.

• The installation of a total of 1,150 fault passage indicators is expected to result in a reduction of 5.6 minutes lost per customer over the course of PR4.

• It is proposed to install single phase reclosers on 150 spurs over the course of PR4. The benefit of these 150 installations will be a reduction of 0.03 interruptions per customer and 0.5 minutes per customer, over the period of PR4.

• It is proposed that provision be made for the installation of 50 remotely operable 38kV LBFM switches during PR4.

6.9 Non Network

Non Network expenditure is forecast to increase from €118m in PR3 to €172m in PR4. The increases are in the following areas:• Telecoms expenditure is increasing as the PR4 submission reflects ESB Telecoms Services (ESBTS) as an integral

part of the ESB Networks business whereas ESBTS was considered a service provider in PR3.

• IT expenditure is increasing due to some very significant projects such as investments in ESB Networks’ proposed mobile programme, a new document management system driven by safety.

• Vehicles – regeneration of the fleet is expected to continue into PR4.

PR4 Proposal €’000 Forecast PR3 €’000

Tools and Instruments 10.0 14.8

Telecoms 53.9 16.6

IT 58.9 41.2

Vehicles 30.0 17.2

Environment 4.0 2.3

Land & Buildings 14.8 10.8

Fixtures & Fittings 0.7 0.1

172.2 102.8Figure 13: Non Network Forecast Spend PR4

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6.9 Non Network

The following sections cover each expenditure area in more detail:

ToolsTools are items of equipment used in network construction and maintenance. They include both mechanical and electrical tools. During PR4 ESB Networks will need to continue to invest in electrical and mechanical tools to support its capital and maintenance programmes and to enhance customer service. Apart from the on-going capital expenditure on tools that is required for replacement of items that have reached the end of their safe working life and in some instances to facilitate new work methods and procedures, ESB Networks will also need to invest in the following during the lifetime of PR4

• Purchasing of additional specialised equipment to locate and identify underground cable faults

• Purchasing of electrical commissioning / testing equipment

• Purchasing of specialised SF 6 gas handling equipment

• Refurbish artic trailer fleet

• Purchasing of forklifts / picker stackers

• Additional MEWPs for scan pole issue

• Additional Telehandlers ( 25 meter rotary Manitous )

• Replacement of existing Manitou fleet ( age, etc. )

• Purchase of drum trailers to comply with new legislation

• Replacement of Quad fleet

• New winches / drum trailers for new LV and MV insulated conductor

• Replacement of existing general duty trailers.

The benefits of continuing with the current equipment model is the continued delivery of an efficient and reliable Tool Pool which is required to maintain customer service and deliver the major capital programmes on the networks.

Telecoms

Integration into ESB NetworksTelecom Services is the provider of utility specific telecommunication solutions and services to ESB Networks and EirGrid. In 2010 CER approved the integration of Telecom Services into ESB Networks. This move reflected the ever growing importance of telecommunications in the effective and efficient operation of the electricity network and the strategic importance for ESB Networks in having full alignment and integration of various telecom services. This therefore is the first price review that Telecom Services is formally a part of.

Telecom Services now operates within the Sustainability & Systems business line in ESB Networks providing services within ESB Networks and to existing Non-ESB Networks customers. Following the move of Telecom Services into ESB Networks, a number of economies of scope have been achieved. The primary synergies have been achieved in the areas of project design, construction planning, and learning & best practice. Economies of scale have also been achieved whereby Telecom Services has leveraged ESB Networks’ buying power.

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6.9 Non Network

On its integration into ESB Networks, Telecom Services did not have a specific regulatory allowance and therefore operated separately to ESB Networks’ Regulatory Framework. Telecoms costs did however form part of Inter Business Unit (IBU) costs and were indirectly part of ESB Networks’ cost base. This is now being regularised as part of this PR4 submission.

The revised business model proposed for Telecom Services is one under which Telecom Services operational and capital forecast expenditure will be included in ESB Networks expenditure plans in line with other areas of the regulated business. This will ensure that Telecom Services is fully embedded into the business. As part of Telecom Services move into a regulatory structure it is proposed that Telecom Services existing assets will be added to the Regulated Asset Base from January 2016 at their net book value of €14.3m at that date and will be depreciated over their remaining regulatory asset life.

In addition to providing services to ESB Networks, Telecom Services will continue to provide services and support to EirGrid and ESB Group. These services include circuit provision, voice services and SCADA support. Services are based on customer usage and charged for on an arms length basis. Income is calculated on an annual basis, and while not guaranteed, this income is expected to range from c.€8m - €10m per annum, depending on customer requirements. This income will be returned to the electricity customer.

Overall the integration of Telecom Services into ESB Networks continues to be very positive from a customer perspective, both in terms of operational efficiencies and costs. The business has seen synergies in terms of economies of scope and scale, communications and systems development, and will continue to work to deliver value to the customer through a mix of cost management and income generation.

Planned InvestmentIn addition to on-going investment in the traditional areas of wide area connectivity, teleprotection, SCADA, uninterruptible power supplies, air conditioning and voice systems, Telecom Services anticipates a significant investment is required in the deployment of a new core IP Network and the development of a National Radio Access Communications Network. These investments will support the anticipated communications requirements of the future electricity network and secure Ireland’s position as a world-class electricity network. A sum of €53.9m has been submitted under Distribution Capex to account for all planned telecoms capital work.

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6.9 Non Network

The most significant expenditures proposed are as follows:• €11.9m Core & Aggregation IP Network : Telecom Services propose to invest in the installation of a scalable new IP

core network. This new IP core network will be a fundamental building block in fulfilling the ESB Networks’ 2027 strategy. It is envisaged that existing and future communications requirements for the electricity network will be supported through this single consolidated new generation network. This network will provide a platform for replacing legacy technologies and systems that are approaching end of life. It will also act as a key enabler of Smart Network Operations. This is due to the fact that virtually all Smart Grid services use IP for communications and thus require an IP network.

• €5.3m National Radio Access Communications Network : Telecom Services propose the development of a national radio access network providing a reliable and cyber-secure network, independently of the public mobile operators, meeting the huge increase in demand for machine-to-machine data communication for the control, protection and management of utility assets. Such a network will require national radio spectrum. Radio spectrum is becoming increasingly scarce globally, as mobile operators demand ever increasing blocks of spectrum to meet customer expectations for broadband services, leaving increasing competition from other users for the remaining spectrum segments. Spectrum auctions are planned in the PR4 timeframe and there is a significant risk that suitable spectrum will become permanently unavailable.

• €4.7m NCCC: The National Customer Contact Centre (NCCC) is the main point of contact for all electricity customers to report faults and emergencies on the electricity network. The inbound and outbound call handling for the ESB Networks Scheduling Support Centre is also handled on the NCCC infrastructure. The NCCC architecture is engineered in order to minimise single points of failure and maximise Business Continuity options to ensure continuity of service for the NCCC. The emergency number must be available at all times and is of strategic importance to ESB Networks. The various systems comprising the NCCC have been in operation since the late 1990’s. Some of these components are approaching end of life and therefore will need to be replaced during the period of PR4.

• €4m WAN Expansion of Operational Fibre Network into HV Stations: Telecom Services provides telecommunication solutions to HV substations that are connected to the Telecom Services’ optical fibre network. This network provides connectivity for operational services such as HV teleprotection schemes, SCADA and OpTel. In addition, it provides remote management capabilities for essential infrastructure such as DC power systems, air conditioning, and the various telecommunications equipment within the stations. The expansion of this operational network involves the deployment of suitable optical multiplexing equipment that will be connected to the fibre at each end of the HV line within the HV station. The level of expansion is directly related to the quantity of new HV stations that are connected via fibre onto the network. In order for new stations to be energised the provision of the required connectivity is essential. The risk of not installing and commissioning the necessary multiplexing equipment to light the optical fibre would result in the inability to provide essential operational telecommunications services for new stations.

Further detail on the wider Telecoms proposals can be found in DF31 Telecom Services..

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6.9 Non Network

Information Technology (IT)Like all modern businesses ESB Networks is increasingly reliant on having the appropriate IT structures and systems in place to support the overall business strategy. IT systems act as business enablers on a number of fronts including improved safety, better investment decision making, optimisation of asset performance, more efficient working and improved cost and service delivery. The Networks business is dependant on the effective generation and processing of large volumes of data from a wide array of sources and the delivery of relevant information in an integrated and user friendly way.

Notwithstanding the major advances that have been made in IT systems during the past years there are still areas of the business where further investment is required to properly support the delivery of business and customer benefits. Also, it is important that existing core systems are enhanced on an ongoing basis so that the initial investment is leveraged to the maximum. The upgrading of existing systems is also a feature ensuring that Networks are always operating on systems that are fully supported by vendors thus avoiding the risks that unsupported systems would bring to the business.

The main expenditure proposed are as follows:• €20.6m Mobile Programme : ESB Networks’ mobile vision is to develop an ESB Networks Enterprise App Store with

many business applications to provide full IT support to staff in the field. These mobile business applications will include work orders, documents, timesheets, maps, forms, etc. It’s estimated that the mobile vision will be realised over a period of 6 to 7 years. The estimated, annual quantifiable benefits when all of these initiatives are implemented is €4.6m. These estimates will be refined during the scope and design stage of each project, as it is initiated.

• €8.1m Enterprise Content Management (ECM): The existing document management protocols and systems in Networks are outdated and inadequate to properly serve the present business needs particularly in relation to safety. Also, the present IT system supporting document management (Doculive) is a very old system and is now out of vendor support. A new Enterprise Content Management strategy is currently being developed to address the current shortcomings and beginning in 2015, it is proposed to implement this strategy across all of ESB Networks over the following years – this will be a challenging delivery and will require the involvement of significant numbers of business users and managers to ensure a successful outcome. It is expected that the new ECM system will be delivered via Sharepoint 2013 which is planned to go live in Networks in mid 2015.

• €7.7m SAP Change Requests : SAP R3 and SAP ISU are the two core IT systems which ESB Networks use to support the delivery of most of our business and market activities and services. As with any organisation the environment in which these systems operate and the associated internal and external business processes are subject to ongoing change. Given the large investment in core SAP systems over the past years it is important to leverage these systems to maximise the business and customer benefits that can be realised through relatively minor system changes. Such changes are implemented through a formal business Change Requests (CR) process which ensures that these requests are prioritised based on business benefit, have funding and resources allocated and a formal project structure in place before any work commences. At the moment there are a significant number of change requests in the pipeline awaiting implementation.

• €2.0m Website Developments: ESB Networks’ website is accessed up to 350,000 times per year and is a significant pillar of our customer communications. However, the current technology supporting the web makes it cumbersome and expensive to maintain and make changes. Businesses, including utilities, particularly in Europe and US are developing more self service options for customers. This is to address changing customer contact patterns including a move away from the use of phone by customers to email, text, twitter etc. and the demand for easily accessible information, as can be seen from the success of the PowerCheck App. It is clear that there is huge potential to grow the share of communication carried by the website as part of our overall communication and branding strategy. The continued development of the website will have the dual effect of improving customer service while also achieving cost savings for the business.

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6.9 Non Network

• €1.9m Customer Charter : The present Customer Charter management system is an in-house application and currently resides on a legacy application (AREAS). This application is over 20 years old and the application, database and the hardware are out of vendor support. An upgrade will allow a redesign of the charter guarantees to better align with the current market. It is hoped that the design can be simplified to reduce operational costs without negatively impacting minimum customer service levels.

Further detail is set out in DF15 IT Projects.

VehiclesDuring PR4 ESB Networks will continue with the renewal of the critical fleet components primarily focussing on the truck fleet which will has been static and has not have investment since PR2. This makes up the bulk of the projected €30m expenditure. Along with this investment, ESB Networks will continue to implement the efficiencies commenced in PR3 from the Tranman Upgrade and a new telematics Fleet Management System. These systems will be further embedded and optimised during PR4 and will deliver line of sight costing and fleet efficiency targets to the business lines. An on-going commitment to improving the safety of our fleet, staff and the public has seen a new Road Safety Strategy launched in 2014. This will allow ESB Networks to continue to build on the 40% reduction in collisions during PR3. PR4 will introduce Driver Behaviour reporting to improve driving behaviours of our fleet further improving fleet, staff and public safety which ultimately will reduce repair and maintenance costs for the fleet.

PropertyExpenditure in this area was deferred to PR4 following the decision to prioritise expenditure in that period. Funding in this area was constrained in PR3. For PR4 the focus is predominantly on general refurbishment works. Over 50% of ESB Networks properties are over 30 years old and refurbishment work is required to facilitate continuation of day to day operations in an efficient and safe manner. Most of the major locations in particular are pre 1980’s buildings and are badly in need of refurbishment to bring them up to modern standards from a heating, sustainability, lighting and electrical safety standards.

Safety and security are two other key areas of expenditure. Safety of both staff and facilities continues to be a number one priority for ESB Networks. A program of work is required to meet fire safety standards and guidelines which will include among other things emergency lighting systems, fire detection equipment and exit signs. It is a continuous effort to maintain standards.

Security has become a major issue during PR3 as a result of the downturn in the economy which resulted in an increased level of intruder activity. This is anticipated to continue over the PR4 period, particularly in the areas of stores, contact centres and contact centre.

ESB Networks’ HQ is currently based in a leased premises in Clanwilliam House, Lower Mount Street, Dublin 2. A review is currently taking place to assess if ESB Networks should continue in this location or relocate to another third party site or alternative ESB location. The plans that the current new Landlord has for the possible major refurbishment of the building may force ESB Networks to make a decision over the course of PR4. This submission contains no cost for a new ESB Networks HQ as solution is as yet unknown. ESB Networks will engage with CER when the solution is developed with a view to addressing in light of the €125m allowance agreed in 2008.

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6.10 Electric Vehicles (EVs) & North Atlantic Green Zone Project (NAGZ)

ESB Networks has maintained its position at the forefront of smart network development internationally and continue to provide direct benefits to our customers. ESB Networks has traditionally and continues to place a very high value on collaboration with both academia and industry to both introduce skills into our organisation in areas which ESB Networks are limited and secondly to re-risk our R&D expenditure.

This has been reflected in on-going international recognition as being an exemplar utility. In December 2013, IBM Worldwide chose ESB Networks as the exemplar international utility for 2013 because of our work in the Smart Grid area. As a result, IBM featured ESB Networks’ Smart Grid strategy on IBM home page www.ibm.com under the title ‘’Ireland shows a new green’’.

EVsElectric Vehicles integration is an area where ESB Networks has taken a proactive lead by initiating several projects to assess the impacts of wide-scale EV charging on the LV and MV networks. These initiatives and the partner organisations that ESB Networks is working with are outlined in detail in DF09 Smart Networks R&D submission. It is ESB Networks’ intention that the distribution system is planned and optimised proactively to facilitate the enabling of the electrification of fleet over the coming years to enable the achievement of Ireland’s ambitious targets in this area. Unplanned integration of electric vehicles is likely to lead to large investment requirements to reinforce LV distribution networks. ESB Networks work on projects such as SERVO (See DF09) protects the end user against these traditional investment requirements.

ESB Networks notes the CER statement of March 5, 2013 including the intent to review the status of the eCars pilot and, if appropriate, to make a decision regarding its status prior to the end of the pilot. In this eventuality, ESB Networks will respond through the appropriate channels/mechanisms.

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6.10 Electric Vehicles (EVs) & North Atlantic Green Zone Project (NAGZ)

NAGZThe North Atlantic Green Zone project (NAGZ) addresses the challenges faced by network System Operators across Europe as the penetration of renewable generation increases to unprecedented levels. This project, to marry intelligent electricity networks, high-speed communications and IT, coupled with increased cross-border connectivity, will enable operational excellence and ensure the involvement of all users. It will be the blueprint for future network deployment on the island of Ireland and across Europe.

The NAGZ project focuses on achieving 5 main goals:

1. Mitigate the technical challenges presented by increasing distributed RES penetration levels

2. Provide variable access capacity on distribution networks

3. Improve continuity and security of supply for all users

4. Reduce losses and deliver energy efficiencies

5. Increase cross-border connectivity and System Operator collaboration.

The NAGZ can be categorised under the following headings;

• Communications Infrastructure

• Advanced Protection and Automation

• 20kV Conversion

• Network Management System

• Cross Border Interconnection.

Each of these headings independently is a substantial undertaking and when combined they are the most significant smart grid undertaking in European history. The fundamental requirement of gaining European funding to undertake the delivery of NAGZ was that all technology has been proven and this has been the case thanks to the PR3 R&D allowance, but undertaking these proven technologies at this scale is a challenge ESB Networks has never faced before, hence significant resources will be required.

The current status of the North Atlantic Green Zone project is that the project received an award of €31.75m in grant funding from the EC in November 2014. Follow up discussions are continuing with the consortium, DCENR and the EC regarding increasing the quantum of the initial award. Exploratory discussions in relation to the composition of the Grant Agreement are scheduled to begin in December.

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7. Operating Expenditure

The following table shows the ESB Networks proposed PR4 Distribution Opex allowance and the projected outcome for PR3.

2016€m

2017€m

2018€m

2019€m

2020€m

PR4Total€m

PR3Forecast

€m

PR3Allowance

€m

Operation & Maintenance 114.4 117.9 116.0 116.7 116.1 581.1 503.6 477.4

Asset Management 14.0 14.2 14.4 14.7 15.0 72.3 66.2 61.2

Metering 40.4 38.0 34.2 33.9 33.6 180.1 140.3 135.9

Customer Service 18.4 17.8 17.8 18.1 18.2 90.2 73.8 79.9

Provision of Data 12.4 12.4 12.9 12.8 12.8 63.3 51.5 75.4

Telecoms 13.2 13.5 13.6 13.7 13.8 67.7

Corporate 10.3 10.3 10.3 10.3 10.3 51.4 55.2 65.5

Sustainability and R&D 4.6 4.7 4.7 6.2 6.2 26.4 9.1 18.5

Rates 46.9 51.0 55.0 59.1 63.1 275.1 185.7 185.7

Other 21.7 21.8 21.8 21.8 21.9 109.2 69.3 60.3

Total Opex 296.4 301.5 300.7 307.2 311.0 1,516.7 1,154.5 1,159.81

Figure 14: Operating Expenditure forecast PR4

Set out below are the areas of expenditure where projections are materially different to the PR3 allowances or PR3 forecast. A more detailed analysis of Opex is set out in DF51 Operating Costs 2016 – 2020.

7.1 Operation & Maintenance Costs

Operations & Maintenance costs include System Control, Safety management, Planned Maintenance and Fault Maintenance.

ESB Networks is seeking an increased maintenance allowance in PR4 versus PR3. The key increases are in the areas of timber cutting and HV stations and the reasoning for this is set out below.

Timber CuttingESB Networks reduced the timber cutting cycles for MV and LV rural networks during PR2. We believe this was a contributory factor in reduced fault incidence on MV overhead lines and improved continuity for rural customers. We also believe it contributed to lower number LV faults reducing fault repair costs. By the end of PR2 we had decided on a 3 year cycle for MV lines and a 6 year cycle for LV.

Given the Irish climate we believe that the 3 year cycle for 38kV and MV represent the maximum interval required to contain the level of timber related faults on those networks. The 6 year cycle on LV rural is necessary to prevent the LV networks being totally overgrown with timber which would lead to higher volumes of day to day faults, serve consequences in wind storms and also would have safety implications. ESB Networks has developed a low cost, contractor based model for timber cutting and has managed to contain unit costs while improving the safety standards of its contractors.

The PR3 allowance for timber cutting was insufficient. In the period 2011-13, ESB Networks curtailed its LV timber cutting programme due to of severe cost opex cost pressures arising from the “additional efficiencies” superimposed on assessed

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7.1 Operation & Maintenance Costs

allowances in that period. Despite the curtailed LV timber cutting activity in that period , expenditure on Timber cutting activities was higher than the annual DPR3 allowance of circa. €17m per annum. ESB Networks reverted to its policy 3 / 6 year on rural timber in 2014 and is forecasting expenditure of €27m. ESB Networks is seeking an annual allowance in line with this necessary level of expenditure in PR4.

HV StationsEnsuring that value is derived of HV stations assets, and that they operate in a safe and reliable manner, absolutely requires the completion of inspections, condition assessments, overhauls and servicing, as well as repair maintenance. Insufficient allowance was made in the PR3 review for maintenance activities in HV Stations. This low allowance was covered inspections, urgent and fault follow-up remedial work. However it did not support the level of planned overhaul and service work that is required for our HV substation plant portfolio given its age and nature of plant which is very different from GB DNOs. Also it did not support high value activities such as testing and condition monitoring. This situation is not sustainable and a higher allowance is required for PR4.

Over time the introduction of condition based strategies are intended to ensure that the maintenance activities completed are effective, in-excessive, targeted and appropriate to the requirements of the asset. Over the medium to long term this will play a vital role in ensuring that HV substation maintenance costs are reduced. However the transition required will demand significantly greater investment in HV substations maintenance in PR4. This is fundamental to:

1. Collection of sufficient plant information to adopt condition based approaches – the allowance for substation maintenance at present does not afford sufficient time for any information gathering or testing activities

2. Complete the body of overhauls which condition assessments currently indicate are required – the allowance during PR3 was insufficient for the completion of many overhauls, resulting in the deterioration of plant.

ESB Networks is seeking €92.3m to cover HV station maintenance for PR4.

In summary, in ESB Networks’ view, the maintenance allowance in PR3 was too low particularly with regard to HV stations and the timber cutting allowance. ESB Networks has spent more on maintaining network assets than allowed despite, in the HV stations area, work completed being less than required and what industry norms would demand. ESB Networks is seeking a higher maintenance allowance in PR4 to ensure assets are appropriately maintained to deliver a safe and reliable distribution system for our customers.

7.2 Asset Management

Asset Management costs are made up of the following:• The cost of the asset managers and their teams who have responsibility for determining policies and managing the

various asset classes such as underground assets, HV station performance & overhead assets.

• Asset Strategy & regulation; and

• Wayleaves, forestry and mast interference payments.

The PR4 Asset Management costs are forecasted to increase by €6.1m versus the PR3 period. Wayleaves makes up €5m of this increase. A further increase is expected in Asset Management due to additional costs associated with new requirements imposed on ESB Networks under the Freedom of Information Act.

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7.3 Metering

The DSO provides a range of services related to metering to all stakeholders operating in the electricity market, including electricity supply companies and customers. Metering operating costs include the management of the meters, the collection and aggregation of metering data, and revenue protection services. Costs are anticipated to increase from €140.3m in PR3 to €180.1m in PR4. The two areas with significant increases are Customer Meter Operation and Keypad Meter Installation.

Costs in Customer Meter Operation will increase as a result of the following:• Increase in the number of Major Meter Testing (MMTs) – there is a policy in place that states how many MMTs

should be carried out each year. Currently ESB Networks is only achieving 33% of the targeted MMTs per annum. The aim for PR4 is to significantly improve on this and the forecast is therefore for an increased number of MMTs.

• Revenue protection costs are set to substantially increase during PR4 for the following reasons

» During the past couple of years of economic downturn there has been a noticeable increase in the frequency of tampering of meters. As the methods of tampering become more and more sophisticated, incidents of tampering are forecasted to escalate during PR4 resulting in increased costs of site visits to investigate these incidents and repair or replace the damaged meters

» Magnetic tampering of PAYG meters

» The increasing presence of cannabis grow houses also result in increased revenue protection costs. Each incident of discovery of a cannabis grow house is an indication that meters have been tampered with. Again this results in increased costs to investigate these incidents and repair or replace the meters.

• QH Meter Readings : it is expected that there will be 30-36% increase in number of QH sites during the PR4 period mainly due to MD meter communications installations and natural NQH to QH transfer.

• SIM cards are required in QH meters and the costs associated with SIM cards is forecasted to increase in line with the forecasted increase in QH sites during PR4.

Keypad Meter Installation - Due to the economic downturn during PR3, the CER initiated a project to look at Pay As You Go (PAYG) Meters for customers in financial hardship. For the PR4 period, the plan is to continue with this project. The costs of this are going to increase during the PR4 period as follows:

• The number of PAYG Meter installations for PR4 is forecasted to be greater than the number installed for PR3. Installations only began midway during 2012 and this is contributing to an increased volume of installations in PR4 versus PR3. The table below sets out the number of meters installed per annum and the costs associated with these.

2011 2012 2013 2014 2015 PR3 2016 2017 2018 2019 2020 PR4

Meters (‘000) 0.7k 14.7k 26.6k 22k 22k 86.0 25.5k 22k 15k 15k 15k 92.5

Costs €’m 0.1 5.2 8.5 11.2 10.8 36.1 15.7 13.0 9.3 8.9 8.4 55.3

Figure 15: PAYG Meter installations forecast for PR4

• The average cost per PAYG Meter installation is also forecasted to increase during the PR4 period. Over the past couple of years, there has been a major increase in the tampering of PAYG Meters with super magnets. To combat against this, improved PAYG Meters are being manufactured by suppliers in China, however these meters are more expensive to manufacture and thus are contributing to the increase in cost associated with the PAYG meters.

For more detailed information on Metering, refer to the document DF12 Meter & Data Services Metering.

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7.4 Customer Services

Customer service costs include the DSO’s Customer Call Centre, Customer Relations and Area Operations. Costs are anticipated to increase from €73.8m in PR3 to €90.2m in PR4. The most significant requirement for additional allowance (€11.5m) is in Customer Relations and arises for the following reasons.

• Increase in safety related advertising – recent public safety incidents have highlighted the continued lack of awareness of the general public to the dangers of overhead and fallen wires. There has also been a significant increase in the theft of overhead conductors and there is a serious risk of injury or death associated with this activity. During PR3, advertising was through radio and print only and was mainly safety related. However customer surveys have shown that the impact of this level of advertising is weakening and ESB Networks now need to develop more targeted and broader ranging advertising campaigns. Over the next few years, this will include campaigns on Public Safety, Readiness for Winter, Power Outages, Vulnerable Customers and Customer Service. While advertising has been mainly concentrated on radio and print, it will now be necessary to develop TV ads to reach a wider audience, which is a more expensive medium of advertising.

• Sponsorship and Community Support – through sponsorships such as the Green Schools Programme and the Ploughing Championship, ESB Networks will support communities, develop awareness and highlight improvements in services and new technologies.

• ESB Networks will develop a new Customer Service Improvement Programme (CSIP) to follow on from CSIP (2013-2016). This will involve identifying customer needs through customer research and focus groups.

• Statutory Instrument 463 highlighted the responsibility of the DSO to Vulnerable Customers. ESB Networks will develop a policy on Vulnerable Customers which will include providing an increased level of support and communication to Vulnerable Customers, communicating with and providing relationships with agencies that provide services to vulnerable groups, such as the elderly and those reliant on medical equipment to ensure that they are prepared for adverse weather and to provide support during power outages.

• ESB Networks will continue to monitor customer satisfaction through quarterly customer satisfaction surveys and will aim to increase its customer satisfaction target to 78%.

• ESB Networks will review its Customer Charter to ensure that the service standards and guarantees contained within it continue to be aligned to customer expectations and standards. As the existing IT system that supports the charter is obsolete, ESB Networks will put in place new processes and systems to support the delivery of its customer service commitments. There will also be an increase in the numbers of resources required to support this enhanced level of customer communication, stakeholder management and advertising.

More modest increases of €2m on PR3 expenditure are required in Area Operations due to the expected increase in activity in Area Operations due to increase level of construction and house building and large transport projects. This will result in increased volume of line diversions, cable tracings and making electrical infrastructure safe for builders and construction, There will also be an increased use of generators to reduce the impact of planned outages.

The call centre similarly seeks a €3m increase on PR3 expenditure to allow the following:

• Customers are increasingly seeking to access ESB Networks services on-line in their own time and ‘on the go’. To meet this need, ESB Networks is developing a new Website which will have the facility to offer additional on line services via web and phone. These will include on-line payment facilities, abilities to log faults, identify restoration times, input meter readings, apply for and track New Connections, etc. Moving more services to ‘self serve’ will also provide a more cost effective response to increases in customer traffic. However, providing this on line service will require significant work on ESB’s SAP system, resulting in additional costs during the PR4 period.

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7.4 Customer Services

• In 2013, ESB Networks launched its Twitter service. This social media communication service has been very successful, particularly in providing information to customers on power cuts and restoration times and also safety information. Analysis has shown that customers are also using other social media channels e.g. Facebook and Boards to ask questions/look for information on ESB Networks services. In order to meet this customer need, we intend to extend our customer channels into these new areas. This will necessitate the setting up of a dedicated social media team within the NCCC which will grow and manage a range of new customer communication channels.

• Planned upgrades to telephone systems to provide enhanced Interactive Voice Services and additional lines for handling large call volumes (e.g. during storms).

• Adverse weather conditions in 2013 and 2014 including Storm Darwin highlighted the need to have additional supports in place to ensure that sudden large peaks in calls can be managed. ESB Networks will be putting in place an external support service through a tendering process to provide this service on a 24 hour basis.

• During the period of PR3, the drop in numbers of new connections and the calls associated with this process meant that staff numbers decreased. The expected economic growth will drive increased customer service requirements and this additional resource is factored into the 2016-2020 costs.

For more detailed information on Customer Service, please refer to the document ‘DF19 Customer Services’.

7.5 Provision of Data

The costs under the heading of Provision of Data include costs associated with:

• DUoS billing and Accounts Receivable;

• Meter Registration System Operator (MRSO);

• Market Opening / Retail Market Design Service (RMDS).

Costs are expected to increase by €11.9m versus PR3. The main reasons for increases in the Market Opening / Retail Market Design Service (RMDS) are as follows:

• RMDS has increased by €4.7m due to a increase in volume of market design work due to National Smart Metering Programme in PR4. This work is likely to be undertaken before the final CER decision on progressing the NSMP.

• Market Support has increased by €4.5m which is mainly attributable to IT infrastructure costs. IT charges are increasing due to a footprint change of 10% over PR4 period.

For more detail please refer to DF12a Meter and Data Services Market Opening/MRSO.

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7.6 Telecoms

As noted above this is the first time Telecom Services costs have been included as a core part of the ESB Networks price review submission as they only integrated into ESB Networks in 2010.

Telecom costs represents ESB Networks’ expenditure associated with the operation of a Utility focussed Telecoms Organisation providing a comprehensive 24x7x365 support structure including a centralised operation centre and regional support, as well as management of sites, systems, licences and third party contracts. A full array of utility focussed services is provided to meet the electricity network requirements. Telecom Services also provide support services to Eirgrid and ESB Group for which they receive income and this income will be returned to the customer under this revised model.

For further detail please refer to 6.9 above and DF31 Telecom Services.

7.7 Sustainability and R&D

The forthcoming PR4 period and the suite of projects in the detailed submission represent an ambitious but realisable set of targets for ESB Networks. The unifying theme of the projects is increased network visibility and control. Increased visibility, particularly at MV level is essential to ensure a successful implementation of the next generation of proactive network control applications. The MV network (10 & 20kV) is the most widespread voltage level in the country and is thus central to almost all future smart network developments. The MV network level is seen as the missing link between the 38kV network and the domestic smart meter. Advanced control and visibility of the MV network will enable the implementation of future technologies efficiently and securely, as well as facilitating possible new markets. Increased visibility at this level will provide the platform upon which increased control and automation can be delivered.

New technologies and concepts to be trialled in PR4 include distributed storage, photovoltaics, variable access wind, demand response management and MV & LV level monitoring and automation. Our vision for these complementary projects is clear: they will deliver tangible benefits to us, our customers and drive smart network development for Ireland.

ESB Networks is seeking a conservative budget of €15m for R&D. Details of the various projects and associated budgets are set out in detail in DF09 Smart Networks R&D.

7.8 Rates

Network Rates constitute a non-controllable pass through cost. The liability is set by the Valuation Office (VO) and is based on the depreciated replacement cost of the assets. The VO conducts a review of the Networks once every 5 years to capture changes to the asset base. The last review took place in 2009 and the review currently under way will determine the charges for the period 2015 to 2019.

The global review considers changes/increases to the asset base and the general movement in commercial rates nationally. The rates trend has and continues to be upwards. The current major revaluation programme of commercial rates by all Local Authorities will see a corresponding significant increase in the rates bill to Networks over the next few years. ESB Networks’ best estimate of this is an increase from €186m to €275m over the period.

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7.9 Other

Other costs are forecast to increase from €69.3m in PR3 to €109.2m in PR4. The major contributors to this are an increase of €25m in Health & Safety and an increase of €13.1m in Environmental costs.

Health & SafetyESB Networks has seen two staff fatalities and two contractor fatalities during PR3. In response the company has put in place a strategy to improve safety in our business with the objective of ensuring that we are incident free. Implementation of this strategy will require the additional expenditure noted above.

ESB Networks must at all times ensure that adequate resources are available to meet the legislative requirements that apply to the activities conducted by the company. The Safety Submission DF33 outlines in Appendix 1 the full range of the legislative requirements that are currently applicable to ESB Networks. This list is growing and developing continually and the changing compliance requirements must be managed in a forward looking way where legislative developments are tracked and plans are in place to manage compliance in advance.

• ESB Networks has a direct responsibility under the SHAWW act to comply under normal operational circumstances by assessing risk, but must also consider “unusual, unforeseeable and exceptional” circumstances that may give rise to additional hazards or increase the risk from existing hazards. Only where the taking of additional precautions is “disproportionate “ to the risk involved is it considered that the employer has done all that is reasonably practicable. This is a heavy responsibility given the scale and scope of work that the company does and the number of staff that are involved in this work in a geographically dispersed organisation.

• The requirement to manage the interaction of the electricity network with our customers is a growing challenge. Legislation sets out the requirements on ESB Networks from project design, through planning and construction, and finally into having appropriate risk management and maintenance policies in place for the assets. These responsibilities must be met without exception at all times.

• DF33 Safety Submission sets out these challenges in more detail and outlines the cost drivers that are forecast in PR4. The primary costs that are forecast for PR4 are driven by:

» Safer Systems of Work Project - €39m

» Revised Work Planning and Scheduling, and Safer Spans of Control €50m to €60m.

Further details on these programmes are in DF33 Safer Systems Of Work Submission.

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7.9 Other

Environmental ESB Networks must comply with legislation across the following areas regarding Environmental responsibilities:

• General Environmental Legislation

• Habitats and Ecosystems

• Air

• Waste

• Water.

Within these 5 areas there are almost 30 individual pieces of legislation that place requirements on ESB Networks. These legislative requirements must be met across all activities in each of the ESB Networks locations around the country. Non compliance harms the environment, our staff, our customers and brings financial and legal implications upon the business.

Identified plans and related expenditure for the period 2016 to 2020 will:

• Facilitate compliance with Distribution System Operator (DSO) Licence requirements

• Help to address the range of environmental issues and aspects identified as part of this submission

• Reduce the level of associated environmental risk exposure

• Facilitate pollution prevention, and where necessary effective emergency response

• Demonstrate ongoing tangible commitment to continual improvement in the manner in which ESB Networks impacts on the environment, and to relevant sustainability objectives as part of ESB’s 2025 Strategic Framework.

Approximately €6.4mof the environmental cost relates to waste management and legislative requirements the full breadth of which are set out in the Environmental submission DF10. In order to facilitate the proper management of ESB Networks’ generated waste and scrap, contracts must be maintained with appropriately licenced and permitted companies for the following waste and scrap disposal requirements - Non Hazardous Municipal Solid Waste (MSW), Hazardous Waste ,Oil Filled Equipment, Scrap Metal, Empty Wooden Cable Drums. Furthermore contracts will be put in in place for Bund, Interceptor, Drain and Grease Trap cleaning and associated waste disposal and Environmental Incident/Spill Response and associated waste disposal.

Circa €5.4m is included for Fluid Filled Cables environmental remediation costs over the PR4 period.

OtherSavings achieved in ‘other’ cost categories are offsetting these additional costs somewhat.

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7.10 Efficiencies

As outlined in our DH01 PR3 Distribution Overview document significant Opex savings were made in the PR3 period. This was achieved despite the challenging operating environment during the period. In addition CER’s assumptions for PR3 resulted in an allowance for operating costs which were significantly lower than ESB Networks’ forecast over the PR3 period. Given the efficiencies already delivered in PR2, this cut represented a severe challenge for ESB Networks particularly given the stretching target service levels. On top of the OPEX targets recommended for PR3, an additional €70m in OPEX reductions (covering both distribution and transmission) were agreed. Despite the adverse impact on economies of scale from a significantly lower PR3 capital programme, Networks substantially achieved all of the operating cost savings targets as determined by CER. The distribution operating cost variance against CER allowed operating costs for PR3 of ~€23m (2% of CER PR3 Opex allowance) is entirely due to the distribution element of the late €70m opex cut as outlined above.

Efficiencies achieved in previous price review periods, ESB Networks’ projected outcome vs CER PR3 allowed and the challenges facing ESB Networks over the next 5 years have all been factored into ESB Networks’ costs for PR4. Furthermore, a 1% p.a. efficiency has been assumed on all controllable costs (all opex costs except rates and depreciation). This has resulted in a saving of €38.2m over the 5 years.

7.11 Benchmarking

ESB Networks is currently undertaking a benchmarking exercise, to compare “TOTEX” spends against GB DNOs, which we plan to be in a position to provide in mid December. That benchmarking will need to take into account a number of significant factors including:

• ESB Networks’ networks length and low customer density

• Comparative levels of payroll costs

• Impact of pre 2009 demand growth on Reinforcement capex

• Connection policies and contestability with regard to New Connections

• Requirements of EirGrid transmission programmes with respect to 110kV network

• Deferral of capex from PR3 due to funding constraints

• Metering activities

• Market opening spends

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8. Pension Recovery

• Other adjustments/normalisations similar to those employed by OFGEM in its benchmarking activities.

The ESB Defined Benefit Pension Scheme is a funded defined benefit pension scheme as defined by the Pensions Act 1990. The Scheme was established under the Electricity Supply Board (Superannuation) Act 1942 and provides benefits based on pensionable salary and service for members and their dependants on retirement, death or ill health. Benefits payable are determined by reference to final salary and the scheme is registered as a defined benefit pensions scheme with the Irish Pensions Board. There was a dramatic fall in investment returns in 2007 and 2008 due the fall in international market returns and increasing life expectancy. Accordingly the Trustees of the scheme brought forward the statutory actuarial review due at the end of 2009 by 12 months. The resulting Actuarial Report of 31 December 2008 highlighted an actuarial deficit of €1,957m largely due to these factors.

Following an extensive examination of the issues associated with the pension scheme, ESB and the ESB Group of Unions proposed a solution that addressed all the key issues raised by the Actuary. This solution was subsequently balloted on and agreed by staff.

Key features of the agreement are the reduction of future pension benefits in order to address the deficit issue through the introduction of Career Average Revalued Earnings (CARE) for service from January 2012, pension freeze to the end of 2013 and pay freeze to December 2011 (subsequently extended to March 2014 under a comprehensive Payroll Cost Base Agreement), capping of any future increases in pensions at 4% per annum and a once-off capital injection of €864m (spread over a number of years but to equal €591m in January 2010 net present value terms) by ESB. These measures to address the deficit and the risk profile of the scheme compare favourably with other defined benefit pension schemes.

Under the Pensions Act, ESB was required to submit a funding plan to the Pensions Board to address any Minimum Funding Standard (MFS) deficit identified in the Scheme. In 2011 the scheme Actuary reported a deficit on an MFS basis, however, as required, an MFS funding plan was put in place to meet the MFS, which takes into account the additional contribution of €591m committed to by ESB.

Pension costs are a legitimate cost of doing business and as such have been allowed for recovery via regulated charges. The Pension fund deficit arose largely due to circumstances outside direct management control i.e. poor investment returns and increasing life expectancy. Many other pension funds, domestically and internationally, have been significantly impacted by these issues.

ESB Networks is seeking to recover €462m (€449m in 2014 money) being ESB Networks’ element of the contribution payable by ESB to address the deficit of as incurred as an additional opex allowance for recovery via regulated charges. Regulatory precedent adopted by the CER and many other regulators including Ofgem, UR, CAR, CAA, etc. is to allow recovery of deficit funding as incurred, i.e. in period to 2018, and this indeed is our advisor’s recommendation. However, in the interest of managing price, ESB Networks is proposing recovery over a 13 year period. It is proposed that the recovery will be spread across distribution and transmission in line staffing levels of both businesses.

ESB Networks and independent commentators consider that the pension agreement is innovative, demanding and effective

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9. Asset Life

and as a key achievement in the PR3 period that protects the customer into the future by reducing the risk profile of the scheme.

ESB Networks has considered whether the 45 and 50 years asset lives for distribution assets and transmission assets is appropriate. Transmission included in this document for completeness.

9.1 Distribution

SKM’s work for Ofgem seems to indicate that:

• the MEAV Weighed average of GB DNO assets excluding UG cables was 51 years

• the weighted average of the GB DNO UG cable assets was 82 years.

When the weighted averages above are applied to ESB Networks distribution MEAVs, the MEAV weighted average technical lifetime of ESB Networks’ distribution assets that results is 59 years. This compares to the GB MEAV weighted average of 73 years. This is not surprising given the physical characteristics of the ESB Networks system are quite different to those of the UK DNOs. Specifically, ESB Networks’ system has 7 times more overhead line per customer than the DNOs.

Ofgem settled on 45 years for investment recovery which was just 60% of the MEAV weighted technical lifetime calculated by SKM. With the same margin for prudence, the appropriate investment recovery period for ESB Networks should be 35 years.

ESB Networks has considered the price impact of such a change and has determined that this change cannot, for affordability reasons, be considered at this point.

9.2 Transmission

Ofgem and SKM determined an average technical life time for Transmission of 54 years. The reason why this is shorter than GB Distribution is that in urban areas there are a substantial amount of LV voltage and MV cables that have very long lives – up to 95 years in the SKM study.

ESB Networks’ transmission MEAV weighted average is shorter than GB as ESB Networks’ network includes country-wide 110kV network with shorter lifetimes than the GB steel tower based 275 kV network, i.e. the transmission MEAV weighted average is shorter than GBs on the basis that the ESB Networks system contains 4,800 km of 110kV overhead lines whose intermediate supports are generally portal wood pole type. These would clearly have shorter asset lives than the GB 275vK and 400kV steel tower supported networks and the GB TX Cables.

Despite this, ESB Networks’ recovery period is 50 years whilst Ofgem have determined that recovery of investment on new transmission assets will be 45 years in the UK. This is despite having a higher technical life than the comparable Irish assets.

ESB Networks believes that the transmission asset lives assumed for recovery are too long and is seeking a 45 year life

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10. Climate Adaptation

within the overall PR4 proposal in line with UK DNOs. This is despite ESB Networks believing that the asset life for ESB Networks should in fact be lower than in the UK as set out above. Again, ESB Networks has determined not to seek a reduction below 45 years due to affordability concerns.

Climate adaptation is an area of real concern for ESB as it has the potential to significantly impact the energy sector in Ireland. Changes in the climate may affect the ability to generate energy, to transmit and distribute electricity and may also affect energy consumption levels. ESB Networks has carried out risk assessment / made enquiries regarding climate change in three different areas.

The first of these is a risk assessment carried out in 2013 by EirGrid and ESB Networks to provide clarity concerning the potential impacts of climate adaptation on the transmission system. The assessment considered the impact of (i) temperature, (ii) precipitation, sea level rise and storm surges and (iii) lightening on the transmission system. The key commitment from the risk assessment is to deliver direct actions that help to reduce vulnerability to climate risks for both the present network and the future network.

Secondly, as substation flooding is one of the most critical affects of climate change, the following risk assessment has been carried out and in some areas still underway.

1. All substations that have been flooded already have had a detailed survey carried out to establish what measures are required to protect equipment and personnel

2. All substations that can be identified to be in flood planes or other at risk places are surveyed to establish what actions need to be taken to minimise damage in the future.

This risk assessment has led to the identification of the substations at most risk from flooding. And from this, key stations have been identified and work will be scoped to try and eradicate the problem.

ESB Networks have also completed Wind and Ice Loading maps for the island to assist in probabilistic engineering design. Calculations will be carried out based on specific locations with site specific wind and ice load mapping, these calculations will then lead to adapted designs to most likely some Western Distribution lines. The calculations may also lead to some more cost efficient Transmission designs. ESB Networks also plan to complete pollution maps to see if there is a need to design for coastal salt.

On 12th February 2014 ESB Networks felt the full impact of the changing climate earlier this year when Storm Darwin hit Ireland. Given the severity of the storm, the unprecedented number of customer outages, the considerable public safety

45

10. Climate Adaptation

issues involved and the monumental effort involved in restoring supply and getting the network back to a business-as-normal basis, ESB Networks took the opportunity to learn from the Storm Darwin experience. For this reason a task group was established to carry out an extensive report on the storm.

The group determined that the performance of both the Transmission and Distribution networks under the extreme mechanical forces of the storm was a significant success. The vast majority of network held up to the storm and operated as originally designed. The renewal programmes carried out on the network over the last number of years paid dividends and the review group strongly believe that this storm would likely have devastated the MV network in the absence of the previous network renewal programmes. ESB’s network was tested up to its design standard (160 km/h) and withstood this test, with two main exceptions. The first exception was that the timber cutting policy on both MV and LV systems only provides for electrical clearance and as such does not consider falling trees. Falling trees were responsible for the majority of the distribution faults and it was recommended that this policy be reviewed with a particular emphasis on 38kV and MV backbone lines. Following the policy review period it has been decided to implement a pilot programme to remove trees within falling distance of MV backbone lines.

The second exception was that some of our transmission lines that were recently built on poor ground fell in the very high winds. A review is currently taking place into this matter and it is essential that the root cause is identified and corrected.

Climate Adaptation will lead to an increased spend on the network. In most cases these costs are embedded in the various projects in PR4. An example of specific stand-alone element of work in this area would be flood alleviation works at both

46

11. Incentives

Transmission and Distribution codes which have a combined forecast of €2.4m spend in PR4. Similarly, the proposed MV timber cutting pilot which is being introduced to try and alleviate storm damage is forecasted to spend €0.7m. Through risk assessments such as the ones carried out to date ESB Networks aims to be cost efficient when implementing climate adaptation measures while also looking at the long term and planning the Networks future.

ContinuityIncentivised focus on improvement of continuity has resulted in steady improvement in the performance of the network as experienced by our customers. Overall continuity performance improved by 60% between 2001 and 2011 highlighting the improvement in service experienced by customers, and also the impact of appropriate incentivisation on ESB Networks performance. This is an area of incentivisation that we believe should endure with some important revisions to be considered by CER:

Modification of storm threshold

The threshold applied in calculating storm days are exempt from the calculation of ESB Networks performance relative to continuity incentives is 61,570 CHL, which represents the average of two standard deviations from the mean of the daily fault data for the 3 years 1999, 2000 and 2001.

ESB Networks proposes that it would be more appropriate to revise this threshold based on more up-to-date information, and a standardised international definition. IEEE 1366-2003 for Electric Power Distribution Reliability Indices defines a Major Event Day (MED) as “A day in which the daily system System Average Interruption Duration Index(SAIDI) exceeds a Major Event Day threshold value.”, and applies a Beta Method to identify such days.

Impact of Planned Work Programmes

There are likely to be some additional work areas undertaken by ESB Networks in PR4. These include Smart Metering and Fibre to the Building. These programmes are likely to result in an increased level of planned outages to existing customers over the period. It is important that the continuity performance targets are set appropriately bearing these programmes in mind. An appropriate allowance must be set per unit of work delivered.

Worst Served CustomerIn 2014 ESB Networks initiated a programme of targeted investigation and remedial works to improve the continuity of supply seen by a group of customers classified as “Worst Served Customers” – those customers who have seen 15 interruptions in the past 3 years and at least 5 interruptions in the past year. There are 47,400 such customers based on 2013 outturn – the last full year of recorded outturn.

ESB Networks proposes a programme to address the continuity performance received by 4,000 worst served customers during PR3. It is anticipated that this will cost a total of €1.4m.

As yet there is very significant uncertainty as to the extent to which it is possible to address WSC issues in full – trials to date have not proven conclusive. Nonetheless, ESB Networks considers this programme to warrant delivery in the interests of taking measures to addressing the needs of those who see the worst networks performance.

The impact of this programme has been included in the forecast continuity outturn, accepting that there is a very high degree of uncertainty surrounding the achievability of these figures. ESB Networks proposes that if it proves possible to remove 75% of the customers targeted from the WSC classification, based on average numbers of interruptions per annum seen by these customers at present, a saving of 0.001 CI per customer and 0.11 CML per customer (nationally) would be achieved.

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11. Incentives

Customer SatisfactionCustomer expectations continue to grow and hence represents a challenge for ESB Networks to meet these increasing demands. ESB Networks will continue to monitor customer satisfaction through quarterly customer satisfaction surveys and will increase its customer satisfaction target to 78%.

2016 2017 2018 2019 2020

78% 78% 78% 78% 78%

Figure 16: Customer Satisfaction forecast targets

ESB Networks will review its Customer Charter to ensure that it the service standards and guarantees contained in it, continue to be aligned to customer expectations and standards. As the existing IT system that supports the charter is obsolete, ESB Networks will put in place new processes and systems to support the delivery of its customer service commitments.

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12. Customer

Customer Service The Networks Customer Care Centre (NCCC) , provides a 24 hour, 7 days per week customer call service to all electricity customers. It also provides dedicated direct support for all electricity suppliers via a separate telephone line. ESB Networks will continue to build on and enhance the services provided by the NCCC. These improved services will include the following:

• ESB Networks will put in place a new Website which will have the facility to offer additional on line services via web and phone. These will include on-line payment facilities and abilities to log faults.

• NCCC will continue to build on the success of its Twitter service (introduced in 2013) and will put in place a dedicated team to deliver customer service via a range of social media.

• Upgraded telephony systems will provide enhanced Interactive Voice Services (IVR) and additional lines for handling large call volumes (e.g. storms).

• Adverse weather conditions in 2013 and 2014 including Storm Darwin highlighted the need to have additional supports in place to ensure that sudden large peaks in calls can be managed. ESB Networks will be putting in place an external support service through a tendering process to provide this service on a 24 hour basis.

• To increase First Call Resolution and optimisation of resources other customer services will be moved to the NCCC.

• NCCC will continue to maintain high standards including its accreditation with The Customer Contact Centre Association (CCA).

• ESB Networks considers it appropriate to reconsider how the NCCC performance is regulated and incentivised during exceptional storm events and seeks to engage with CER to develop this area further.

The NCCC will continue to meet all regulatory targets during the period 2016-2020:

Performance Against regulatory targets - NCCC Incentive Mechanism

Year 2016 2017 2018 2019 2020

Targets

Speed of Tel Response 83% 83% 83% 83% 83%

Abandonment Rate 5% 5% 5% 5% 5%

Mystery Caller 80% 80% 80% 80% 80%

Callback Survey 80% 80% 80% 80% 80%

ESATRAT(Performance Target) Figure 16: Performance Against regulatory targets - NCCC Incentive Mechanism

49

12. Customer

The service provided by ESB Networks to meet the service levels required by Suppliers to their Service Orders will continue to be a priority. Enhancements to the Click Scheduling system and the deployment of the new Mobile Device for Network Technicians will facilitate the availability of more detailed information to NTs dealing with customers and aid communication and reporting for Suppliers.

During the period 2016-2020 ESB Networks will continue to improve customer service and will develop a new Customer Service Improvement Programme to follow on from CSIP 2013-2016. Training of front line staff in customer service and dealing with a wide range of customer groups including those with specific needs will be delivered.

Providing an increased level of support and communication to Vulnerable Customers will also form part of our Customer Improvement Programme. Our policy will be to build relationships with agencies that provide services to vulnerable groups, such as the elderly and those reliant on medical equipment to ensure that they are prepared for adverse weather and to provide support during power outages.

ContinuityThe continuity forecast, planned and unplanned, for the period 2016 – 2020 is presented in the following two graphs.

CML Total160.0

■ Planned■ Unplanned

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0

2016 2017 2018 2019 2020

Figure 17: Forecast SAIDI 2016 - 2020

CI Total160.0

■ Planned■ Unplanned

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0

2016 2017 2018 2019 2020

Figure 18: Forecast SAIFI 2016 - 2020

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12. Customer

The baseline used in these forecasts is the average outturn in the years 2009, 2010 and 2013. It was considered appropriate to omit 2011, 2012 and 2014 as outliers. 2011 and 2012 were the two lowest CHL outturns ever recorded on the Irish distribution system – 15% and 10% lower than the previous record low year, and there have only been three months ever recorded to have had fewer than 2000 CHL; all were in 2011 and 2012. With the exception of August, the total CHL in every month of the year was less than the average month outturn over the 5 surrounding years – including February which was 56% lower than this average, March which was 48% lower, July which was 36% lower, January which was 34% lower. Conversely, in 2014 to date there have been 2.5 times as many storm days as in 2011 and 2013 combined, and the 15 storm days recorded in 14 years. The highest number of CHL on record in a month, and the third highest, were both in 2014 – with the only month’s outturn to come to a similar level occurring back in 2008.

A further reason to believe that 2009, 2010 and 2013 are reasonable “baseline” years, is that due to unforeseen circumstances during PR3, very little capital investment in continuity improvement has been made since the period of 2009 / 2010. However through carefully targeted and delivered continuity improvement investments, it is intended that the negative impacts of natural degradation of networks, environmental factors, 20kV conversion and increased levels of earth fault tripping on MV networks can be addressed and CI and CML brought down through the use of technological interventions.

The impact of climate change has not been allowed for in these forecasts, due to the uncertainty as to the magnitude of its impact, the rate of amplification of its affects, and period over which this will be seen. Already storms have had a greater impact on year-on-year outturn of interruptions than any other identifiable factor. The incidence of trees falling, and branches of trees coming into contact with lines is far greater under storm conditions, while the exceptionally high proportion of overhead networks on the Irish distribution are far more conducive to interruptions due to this than in other jurisdictions. Furthermore, increasingly stormy conditions serve to accelerate the deterioration of exposed assets, and lead to faults where there are pre-existing plant vulnerabilities. In summary, the greatest caveat on the forecast presented is that continued climate change could result in deterioration of continuity, the extent of which is unknown.

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13. Safety & Resourcing

There have been 4 work based fatalities in our business in the last 4 years. In response the Company has put in place a Strategy to improve Safety in our business with the objective of ensuring that we are incident free. Implementation of this strategy has the potential to be disruptive to the delivery of our work programme. CER’s support in the delivery of our strategy will enable us to move forward effectively.

Irish legislation dictates that the employer must do all that is “Reasonably practicable” to reduce the risk posed by any hazard. (Ireland, Safety Health & Welfare at Work Act 2005) Section 8(1).

Until 15th January 2013, Networks believed its SMS was, in so far as is reasonably practicable, a safe system of work. This was based on the following:

• Ongoing risk assessment deemed existing control measures and procedures to be sufficient to mitigate the risk.

• External assessment of our SMS met OHSAS 18001 accreditation standards.

• Lost Time Injuries (LTI’s) had consistently reduced year on year from 323 in 1997 to 23 in 2012.

What is reasonable (and expected of the employer) in control measures is linked directly to the risks involved. Where the risks are significant (e.g. death) then virtually all possible control measures are deemed reasonable and proportionate. On the 15th January 2012 this became a reality with the death of Shane Conlon (RIP).

A robust and extensive investigation was initiated following Shane’s death. One specific recommendation is of particular significance for the business:

ESB Networks should carry out an assessment of the effectiveness of its Overall Safety Management System (SMS):

» Documentation management

» Overall management of technical skills and competencies

» Compliance with work management systems

» Auditing of compliance by Management and Staff.

Having identified gaps in ESB Networks’ SMS, an external benchmark assessment against peers was then carried out.

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13.1 Safety Strategy

ESB Networks has developed a revised safety strategy which has number of different elements. The strategy leads with a statement of “value”, followed by the behaviours that are essential for the effective implementation of the Safety Management System. Once these are in place, the changes and improvements in the system can take effect.

The safety strategy and the implementation of the elements outlined above, are dependant on a number of separate business projects and must be enabled through these. Such programmes are outlined here:

Organisation Design ReviewThe ability of the current supervisor/NT structure & model to effectively meet the requirements of the revised safety management system is being assessed. The implementation of the outcomes from this review are a pre-requisite for the successful implementation of the revised safety management system.

Strategic Resource Plan (SRP)Clearly there is an interdependence between the Strategic Resource Plan (SRP), its associated succession plan and the safety strategy. The SRP is an enabler for both the Organisation Design Review and the implementation of the Safety Strategy.

MobileAs confirmed by Accenture as part of the ECM strategy, mobile technology for field staff is an integral part of an effective ECM system. It is only through mobile that a business can effectively and efficiently ensure that front line staff:

• Have the right document at the right time in the right place

• That all documents relevant to the work in hand have been identified

• That such documents are the most up to date version

• Are informed immediately of any safety-critical issue, and that the business have an assurance process that this is effective.

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13.2 Work Practices

The Safety Strategy will drive the additional preparation and support of all work conducted in ESB Networks. It is inevitable that this will require resourcing. Practical examples of this include:

• Risk Assessment: Develop greater levels of pre-site risk assessment, prior to the issuing work.

• Work Procedures: Prior to the issuing of work, assess the suitability and appropriateness of work procedures for each specific task. Revise to site specific procedures as necessary.

• Work Packs: Preparation of site and task specific work for all work.

• Approvals: Extension of the current approvals systems to cover all competence areas, including technical, non-technical and non electrical.

• Use Of Approval: Log and track the “flying hours” of competence based tasks to verify the validity of approvals.

• Regular Training: Formal re-training programmes for all high risk tasks. Programme and frequency based on risk assessment.

• Continuous Formal Learning: Extend the formal investigation of incidents to all near miss reports that had the potential of serious injury.

• Continuous Informal Learning: Develop a process of proactive and speedy resolution of all safety issues raised.

13.3 Resourcing Over the course of PR2 and PR3, ESB Networks has significantly rationalised its business reducing headcount and resulting payroll costs. This was predominantly driven by the need to attain cost savings. It has had a number of significant implications for the business however.

• It resulted in a significant loss of knowledge in the management and maintenance of the networks assets. ESB Networks must now right size its business and prepare the organisation to ensure the appropriate knowledge transfer and development of competence to maintain the assets safety and efficiently

• It has resulted in an increase in the age profile of ESB Networks as can be seen in the graph on the next page.

• The numbers operating at supervisory level are now extremely low as compared to UK DNO’s and the effects of this are now being seen in the business.

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13.3 Resourcing

The table below demonstrates the challenge facing ESB Networks in renewing its workforce.

Networks1400

1200

1000

800

600

400

200

0

<20 yrs 20-29 yrs 30-39 yrs 40-49 yrs 50-59 yrs 60+ yrs

Figure 19: ESB Networks Age Profile

It can be seen clearly that the average age of staff in the business is extremely high and this is something that the business needs to address. ESB Networks have developed a Strategic Resource Plan to effectively deal with the upcoming challenges and during PR4. The business will need to recruit and/or train a significant number of staff to integrate into our organisation or to upskill to take on more demanding roles. This will result in increases in the operating costs of ESB Networks which would not have been encountered to this extent during PR2 or PR3. In particular, ESB Networks will incur costs in the following areas:

• Recruitment costs

• Non productive salary costs

• Training costs.

This expenditure however is absolutely critical if ESB Networks is to ensure that there are sufficient staff that are well trained and competent and have sufficient support to carry out their roles.

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14. DSO Conclusion

Networks considers that this proposal for the PR4 period is appropriately balanced to ensure ESB Networks can continue to deliver on its licence obligations to provide a safe and reliable distribution system for our customers and the economy during PR4, whilst maintaining excellent customer service at an affordable price.

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DSO Appendix 1

Distribution Assumptions, Revenues & AUPThis appendix sets out the key assumptions used in modelling ESB Networks’ PR4 submission. It also sets out the resulting DUoS revenue and AUP impacts of the proposal. These are presented for the two scenarios, the base case and the case including Smart Metering.

The table sets out some of the key assumptions inherent in the PR4 submission and the high level outputs:

Key Assumptions Base Case SMART Sensitivity

Dist

SMART & Non Network

Total Gross (Real 2014)

€1,579m

€195m

€1,774m

€1,579m

€970m

€2,549m

Growth–cumulative 2016-2020

See DF04 Global Assumptions 9.2% 9.2%

WACC

See DF57 WACC & Financeability 4.98% 4.98%

Opex €1,468m €1,470m

Average FFO / Net Debt

See DF57 WACC & Financeability12.5%

12.3%

DUOS AUP Cumulative Impact +0.0% (real) +8.8% (real)

Figure 20: Distribution assumptions, revenues & AUP

Base CaseThe impact of these assumptions is a Revenue and AUP profile as set out below:

2016 2017 2018 2019 2020

Opex 312,471 317,529 316,736 323,220 327,115

WACC 260,337 257,348 263,959 267,093 276,128

Depreciation 191,693 199,479 207,138 212,147 217,337

Total Allowed Revenue 764,501 774,356 787,833 802,460 820,581

NPV of Price Review Revenue 3,500,090

GWhs 23,523 23,826 24,241 24,691 25,249

AUP (c/kWh) - 2014 monies 3.25 3.25 3.25 3.25 3.25

AUP % Increase 0% 0% 0% 0%

Figure 21: impact of these assumptions is a Revenue and AUP profile

57

DSO Appendix 1

Figure 22: Total Allowed Revenue

Base Case plus SMART MeteringThe Base case submission does not include any capital expenditure (CAPEX) and operating expenditure (OPEX) for SMART Metering. However we have included a sensitivity on the base case including the SMART metering project. As per the current Cost Benefit Analysis (CBA) the expected CAPEX spend on SMART metering in the 2016-2020 period is €798m. In addition metering costs in total would increase by approx. €8m. Including this expenditure would have the following impact on DUoS allowed revenue, DUoS AUP and FFO / Net Debt:

2016 2017 2018 2019 2020

Opex 304,914 311,699 320,618 325,619 336,216

WACC 279,563 279,782 279,935 276,210 264,551

Depreciation 193,056 209,498 228,259 256,761 292,176

Total Allowed Revenue 777,533 800,980 828,812 858,590 892,943

NPV of Price Review Revenue 3,679,349

GWhs 23,523 23,826 24,241 24,691 25,249

AUP (c/kWh) - 2014 monies 3.31 3.36 3.42 3.48 3.54

AUP % Increase 1.70% 1.70% 1.70% 1.70%

Cumulative AUP % Increase 8.82%

Figure 23: Base Case plus SMART Metering

■ Opex■ WACC (inc

smoothing)■ Depreciation

Total Allowed Revenue

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