Presentation on theme: "Insert strapline Developing quality incentives Cemil Altin Head of European Gas Policy November 2006."— Presentation transcript:
Insert strapline Developing quality incentives Cemil Altin Head of European Gas Policy November 2006
Insert strapline The situation in 1999 Ofgem are undertaking a price control of electricity distribution companies There is concern (industry, academic, and at Ofgem) that the strong efficiency incentives under RPI-X may be discouraging good quality of service to consumers There is some quality of service “protection” in place BUT it is targeted payments to individual customers (guaranteed standards of performance) and non-financial overall standards of performance The industry have their own approach to reporting on network performance (e.g. number and duration of interruptions to supply)
Insert strapline What should we do? Impose incentives to deliver better quality of service? Do nothing? Assess customers’ preferences Reduce efficiency incentives to redress the balance?
Insert strapline The first step Assess customers’ preferences and willingness to pay (using extensive survey) –Customers’ preferences – what aspects of quality of service are important/valued –Customers’ willingness to pay – how much are they willing to pay for improvements Result: –customers value number and duration of interruptions and receiving a good response when they contacted the company in the event of an interruption –they are willing to pay a modest amount for improvements in quality of service – not an “open-ended cheque”
Insert strapline What should we do now? Set targets for the areas that customers’ value Look at past performance and understand the data Set a financial incentive – e.g. £10 per unit improvement
Insert strapline Review data and performance We reviewed the data on number and duration of interruptions to supply –Found that companies using significantly different definitions and ways of measuring number/duration of interruptions –Up to 40% of differences in performance could be attributed to these factors What do we do now? –Set incentives anyway (but keep the financial exposure very low to overcome data problems)? –Develop better reporting arrangements?
Insert strapline Developing better reporting Ofgem developed standard reporting arrangements – detailed definitions Ofgem developed accuracy reporting requirements – and began to audit companies’ data Begin to build confidence in the data and therefore confidence in any incentive – allows greater financial exposure and therefore ability to change behaviour
Insert strapline Now we have better data – what do we do? Develop the incentive arrangements –What type do we want? Just set a £/unit improvement Set targets and incentivise delivery Remember – not an open-ended cheque What about the quality of response when customers contact companies?
Insert strapline The incentive arrangements Targets for number and duration of interruptions to supply – a rate of improvement over 5 years (with annual targets) A monthly survey of customers that had contacted companies to assess the quality of their response Now…..how strong to make the incentives? –The data on customers’ willingness to pay was not ideal/differed across companies
Insert strapline The strength of the incentives Decided that 2% of price control revenue was appropriate level of exposure given it was a new scheme (and remaining worries about data) and also overall risk profile The 2% was “divided” between the 3 measures based on customers’ relative preferences Companies received a symmetric penalty/reward for beating targets on number/duration of interruptions Companies received a fixed reward for improving performance under the customer survey to assess their quality of response
Insert strapline Did it work? Yes – improvements in performance across all 3 measures for most companies Yes – a real change in behaviour – directors’ pay linked to performance and attitudes in call centres Yes – provided a balance against the strong efficiency incentives on costs No – targets possibly not hard enough – but can be reviewed with experience
Insert strapline Promoting choice and value for all gas and electricity customers