1 A Review of Potential Gains from Reforms ECRA Workshop 6 November 2006 Dr Brian Wharmby Independent Consultant, former Technical Director of Ofgem Tel

2 Elements of Reform n Main objectives are to –Reduce or remove Government control –Reduce or remove Government ownership –Increase efficiency and reduce costs –Increase customer choice –Encourage private investment

3 Successful Reforms Involve Several Key Factors n Government commitment to reforms n Effective and independent regulation –reduces political influence……. –….and facilitates transparent decision- making n Private sector investment n Effective competition

4 Regulatory Independence n Decision-making independence –Challenges only through legal processes n Institutional and management independence –Outside government control n Financial independence –Secure source of funding

5 Potential Benefits of Reforms n Benefits for customers n Benefits for investors

6 Benefits for Customers n More efficient electricity sector n Better access to services n Improved service –Technical performance –Commercial service n Better pricing

7 Benefits for Investors n Financial rewards for efficient companies n Ability to compete –With other companies –With the regulator

8 An Example - Electricity in Great Britain Statistics: Area km 2 28 Million electricity customers 370TWh consumption 57GW peak demand One Transmission Operator, three Transmission Owners: km of network 14 Distribution Companies: Size range 0.6 to 3.3 million customers km of network 62% underground, 38% overhead

9 Example Benefits for Investors – Great Britain n Reduced operating costs –Staffing levels since 1990 n 1990: 5.8 employees per 1000 customers, 2200MWh per employee n Today: staff levels reduced by more than 50% –More efficient working practices –Typical productivity gains of 3.5% pa in the eight years following reform n More rapid take-up of new technology n Better-than-expected returns to investors –Initial ROCE over 10%, falling to 8% under regulatory pressure

10 Trends in the Marketplace and Ownership – Distribution and Supply Initial price controls Separation of functions Price controls tightened Supply market fully open Increased number of suppliers Public ownership American investors move in European owners replace Americans Horizontal integration Vertical integration with generators

11 Example Benefits for Customers – Great Britain n More efficient and responsive electricity sector n Improved technical performance –Interruptions reduced in frequency and duration by 20-25% n Improved commercial performance –Commercial quality standards for monopoly services –Competitive pressures in generation and supply n Prices have been lower than they would have been in an unreformed sector

12 GB Results on Technical Performance n average frequency and duration of interruptions reduced by around 20% n Since 2002, further 7% improvement n Latest statistics show –Average interruption rate (SAIFI) 0.83 per customer per year –Average interruption duration (SAIDI) 82 minutes per customer per year

13 CEER results for Interruptions in European Countries CEER Benchmarking Report 2005

14 –Connections –Accuracy of estimated bills –Responding to failure of supplier’s fuse –Estimating charges –Voltage complaints –Meter problems –Telephone service –Queries on charges and payments –Appointment scheduling –Responding to customer’s claims –Responding to customer’s letters –Estimating charges –Carrying out works Commercial Quality n Areas covered Guaranteed and Overall Standards are used to introduce penalty payments or business incentives

15 GB Domestic Electricity Prices Initial price rise due to Vesting arrangements Sustained price fall due to competition and regulatory pressure Recent price rise due to increased oil and gas prices

16 But……things never stay the same n Reform is a continuous process n Competition and incentive regulation has been successful….. n …..But new pressures emerge over time –Long-term security of supply n Network stewardship n Generation and fuel supply security

17 Reform is a Cyclic Process n Political intervention is tempting for governments…. n …..especially if there are perceived failings in reform arrangements –Major supply failures –Security of supply –Fuel diversity n Most “Reform Frameworks” are changed periodically –10-15 year timescale in countries with mature electricity sectors –More frequently (2-4 years) in developing economies or where reforms fail to be effective n The future will inevitably bring more change driven by –Climate change –Security of supply

Thank you….. Brian Wharmby