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