Commission for Regulation of Utilities Reporting and ......An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities ii new investment of €1,024m1, and operating costs

An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities

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Consultation

Reference: CER/17/335 Date Published: 12/12/2017 Closing Date: 26/01/2018

An Coimisiún um Rialáil Fóntas

Commission for Regulation of Utilities

Reporting and Incentives

under Price Review 4 Consultation


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Executive Summary In December 2015, CRU set the price controls for the electricity networks Price

Review 4 (PR4) period for EirGrid as Transmission System Operator (TSO), and for

ESB Networks (ESBN) as Transmission Asset Owner (TAO) and Distribution System

Operator (DSO)/Distribution Asset Owner (DAO). In the Decision, CRU also

committed to update the reporting and incentive arrangements. The PR4 period runs

from 2016 to 2020.

Monitoring and reporting give visibility to what each company is delivering, and

improve accountability. Incentive mechanisms go a step further by attaching

additional rewards or penalties to specific reported measures of performance. Data

generated through reporting and incentives helps to inform the more detailed cost

assessments and forecasts involved in future price reviews, and ongoing regulatory

scrutiny. They are, therefore, important instruments through which CRU seeks to

protect the interests of customers.

This document sets out and seeks views on proposals for improving reporting and

incentives arrangements. These proposals will improve outcomes for electricity

customers and market participants during the PR4 period, and create a robust

platform for the continuing development of reporting and incentives for PR5 and

beyond.

Views are invited on these proposals by 26 January 2018.

Transmission

EirGrid as TSO is responsible for operating the power system in real-time, and

planning transmission network development. It also contracts with generation and

demand customers for connection to and use of the transmission system. ESBN as

TAO is responsible for maintaining the transmission network, and undertaking

transmission investment at the request of the TSO.

Under PR4, allowed revenues of €1,974m for the period were provided on behalf of

customers to fund the activities of the TSO and TAO. This was set to support total


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new investment of €1,024m1, and operating costs of €810m.

Reporting and monitoring (Proposals 1-3)

CRU is proposing the following changes to strengthen monitoring and reporting of how

these allowances are spent, and what levels of performance they deliver for

customers:

Re-set the requirements for the Annual Performance Report (APR) to produce

a new, consolidated TSO/TAO report containing a wider range of performance

measures, more information with which to understand the context for

performance, and be presented in more accessible and reader-friendly format;

Require the publication of a companion document of comparable readability to

inform stakeholders how network investment needs are being identified, and

how options to meet those needs are being developed, evaluated and

delivered;

A more formal process for the TSO or TAO (or CRU) to use monitoring

information to trigger an adjustment to capital expenditure allowances, if new

information reveals the existing allowances to be materially too high or low.

Incentives (Proposals 4-10)

The total amount at stake through incentives was set at 4% of operating costs for the

TSO, and 5% of operating costs for the TAO in PR3. CRU is proposed to retain these

overall incentive “pots” for the remainder of PR4, and refocus them in the following

ways:

Retain the existing TSO performance incentives around System Minutes Lost

and System Frequency, updated for recent data on actual performance;

A new incentive mechanism for performance on investment planning and

delivery, to replace the narrower PR3 focus on individual project milestones

on the portfolio of “live” projects being progressed by the TSO;

1 All values are in real 2014 prices unless otherwise stated.


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Augment the existing TAO incentive on managing outages, to provide greater

flexibility for the TSO and TAO to work together to re-schedule outages at

short notice if the wider market benefits outweigh the additional costs;

A new incentive mechanism relating to the quality of stakeholder engagement;

A new incentive to reward the TSO for delivering exceptional outcomes

against key strategic objectives; and

A new formalised process for developing and reporting on innovation projects,

including the option for the TSO to submit applications for additional funding

where the business case is sufficiently strong.

The TSO’s incentive is symmetrical and is 4% of the TSO’s internal Opex,

which means the TSO can earn a maximum reward/penalty of €9.32m

The TAO’s incentive is symmetrical and is 5% of the TAO’s Opex, which

means the TAO can earn a maximum reward/penalty of €15.03m

This constitutes a combination of updating existing, proven incentive mechanisms for

new data on achievable levels of performance, and introducing new incentive

mechanisms to focus better on the TSO and TAO behaviours that in CRU’s view make

the biggest difference for consumers and market participants.

Distribution

ESBN as DSO/DAO operates the distribution system in real-time, and plans

extensions and reinforcements to the distribution network. It also manages the

allocation of rights to connect to and make use of the distribution system.

Under PR4, allowed revenues of €4,126m for the period were provided on behalf of

customers to fund the activities of the DSO/DAO. This was set to support total new

investment of €1,337m, and operating costs of €1,362m.

Reporting and monitoring (Proposal 11)

CRU is proposing the following changes to strengthen monitoring and reporting of how

allowances are spent by the DSO, and what levels of performance they deliver for

customers


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Consistent with the proposals for Transmission, to re-set the requirements for

the Annual Performance Report (APR) to produce a report containing a wider

range of performance measures, more information with which to understand

the context for performance, and presented in more accessible and reader-

friendly format.

Incentives

The total amount at stake through incentives was set at 4% of annual allowed

revenues in PR3. CRU is proposed to retain this overall incentive “pot” for PR4, with

this total concentrated over the remaining three years of the PR4 period. CRU is

refocusing the suite of incentive mechanisms in the following ways:

Retain the PR3 DSO incentives around unplanned Customer Minutes Lost

and Customer Interruptions, updated for new information on achievable

performance – and using a more accurate, standardised method of adjusting

for storm events;

Retaining the PR3 incentives around customer service and traditional

metering, updated for new information on achievable performance;

A new incentive mechanism linked to the DSO’s delivery of smart metering

services to Suppliers by Q4 2020 under its revised plan to support the

National Smart Metering Programme;

A new incentive mechanism relating to the quality of stakeholder engagement;

A new incentive to make available, or claw back, funding based on the DSO’s

performance in delivering sustained improvements in supply continuity for

6,000 of Ireland’s worst-served customers; and

A new formalised process for developing and reporting on innovation projects

pursuant to the Strategic Innovation Fund, with access to a significant

proportion of the Fund contingent on implementing a strong innovation

strategy.

The DSO’s incentive is asymmetrical and is based on the DSO’s total

revenue, which means the DSO can earn a maximum reward €147.52m or a

penalty of €178.46m.


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Public/ Customer Impact Statement

The electricity transmission and distribution systems deliver vital services for

customers. The Commission for Regulation of Utilities (CRU) ensures these services

are delivered efficiently and securely. The CRU does this by monitoring and

incentivising the behaviour of the Transmission System Operator (TSO), the

Transmission Asset Owner (TAO) and the Distribution System Operator (DSO).

The CRU’s overarching objective in proposing new mechanisms in this paper is to

ensure that incentives are targeted on the TSO and TAO behaviours that can make

the most positive difference to network users and consumers.

The impacts of the proposals on monitoring and reporting set out in this document are

informational. They afford energy customers and the wider public with more and

better information on what is being delivered in return for the revenue allowances

being provided on their behalf. Further, the information generated through these

reforms should over time lead to improvements in the CRU’s ability to make regulatory

decisions that protect the interests of customers.

The impacts of the proposals on incentives for the TSO, TAO and DSO are financial

and quality-of-service related:

First, the proposed incentives will have a direct impact on transmission and

distribution tariffs over the period 2019 to 2021. This is because the rewards

or penalties earned under the incentive schemes will impact tariffs the year

after the performance is measured. Transmission and distribution charges

are one of the inputs to each customer’s electricity bill. Where the network

companies outperform these incentives, to the benefit of consumers, they will

receive a financial reward that will be paid for through consumer network

charges. Where a weak performance will result in financial penalties to the

network companies that will put downward pressure on consumer’s network

charges.

Second, the incentives will impact on the quality of services provided by the

TSO, TAO and DSO/DAO. Companies will only be rewarded if they deliver

outputs that customers and the market value, e.g. higher than expected

supply quality, or strong stakeholder engagement. Collectively, the impact is


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to ensure that the prices customers pay are more closely aligned to the quality

of services they receive.


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Table of Contents

1. Introduction ........................................................................................................ 1

1.1 Commission for Regulation of Utilities ........................................................................... 1

1.2 Background ................................................................................................................... 1

1.3 Purpose of this proposed decision ................................................................................. 2

1.4 Related documents ....................................................................................................... 2

1.5 Structure of this document ............................................................................................ 2

1.6 Responding to the CRU .................................................................................................. 3

2. Context ............................................................................................................... 4

2.1 Industry structure ......................................................................................................... 4

2.2 The role of reporting and incentives .............................................................................. 4

2.3 PR3 reporting and incentives ......................................................................................... 5

2.4 CRU’s objectives for PR4 ................................................................................................ 7

3. Transmission – reporting .................................................................................. 9

3.1 Output-based reporting ................................................................................................. 9

3.2 Capex monitoring ........................................................................................................ 12

3.3 Capex adjustment process ........................................................................................... 14

3.4 Consultation question ................................................................................................. 15

4. Transmission – incentives .............................................................................. 17

4.1 System performance – TSO .......................................................................................... 17

4.2 Investment Planning and Delivery (IPD) – TSO .............................................................. 19

4.3 Project delivery – TAO ................................................................................................. 21

4.4 Outage management ................................................................................................... 23

4.5 Stakeholder engagement ............................................................................................. 25

4.6 Delivering against strategic objectives ......................................................................... 27

4.7 Innovation .................................................................................................................. 29


5. Distribution – reporting ................................................................................... 32

5.1 Output measures ........................................................................................................ 32


6. Distribution – incentives ................................................................................. 36

6.1 Unplanned outages ..................................................................................................... 36

6.2 Worst-served customers .............................................................................................. 38

6.3 Customer service ......................................................................................................... 40

6.4 Metering – traditional ................................................................................................. 42


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6.5 Metering – smart ........................................................................................................ 44

6.6 Stakeholder engagement ............................................................................................. 46

6.7 Strategic and innovative thinking ................................................................................. 47


7. Incentives as a package .................................................................................. 53

7.1 TSO incentive package ................................................................................................. 53

7.2 TAO incentive package ................................................................................................ 55

7.3 DSO/DAO incentive package ........................................................................................ 58


Annex 1: International review ................................................................................................ 64

Annex 2: Draft Annual Reporting Principles ............................................................................ 66

Annex 3: TSO incentives......................................................................................................... 68

Annex 4: DSO incentives ........................................................................................................ 71

Annex 5: Questions for consultation ....................................................................................... 73


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Glossary of terms and abbreviations

Abbreviation or Term Definition or Meaning

PR3 The third electricity price control set by CRU, spanning the period January 2010 to December 2015

PR4 The fourth electricity price control set by CRU, spanning the period January 2016 to December 2020

TSO Transmission System Operator – EirGrid

TAO Transmission Asset Owner – ESB Networks

DSO Distribution System Operation – ESB Networks

DAO Distribution Asset Owner – ESBN Networks

APR Annual Performance Report

CI Customer Interruptions - the average number of interruptions per customer connected in the year (CI) – Distribution System

CML Customer Minutes Lost - the average number of minutes without supply per customer connected in the year (CML) – Distribution System

SML System Minutes Lost (SML) – Transmission System

SF System Frequency (SF) – Transmission System

WSC Worst Served Customer

SIF Strategic Innovation Fund

PIP Project Implementation Plan


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1. Introduction

1.1 Commission for Regulation of Utilities

The Commission for Regulation of Utilities (CRU) is Ireland’s independent energy and

water regulator. Our Mission is to regulate Water Energy and energy safety in the

public interest.

Further information on the CRU’s role and relevant legislation can be found on the

CRU’s website at www.cru.ie.

1.2 Background

CRU is responsible for the economic regulation of the system operators and asset

owners for electricity transmission and distribution.

Price controls, which limit the revenues that the relevant licensees can recover from

electricity consumers, are set every 5-years. CRU also has powers to require

licensees to submit or publish reporting information, and to set incentive schemes

(with associated financial or reputational rewards or penalties) for specified areas of

activity.

In December 2015, CRU set its price controls for the Price Review 4 (PR4) period for

EirGird as Transmission System Operator (TSO), and for ESB Networks (ESBN) as

Transmission Asset Owner (TAO) and Distribution System Operator

(DSO)/Distribution Asset Owner (DAO). In the Decision, CRU also committed to

update the reporting and incentive arrangements.

It should be made clear from the outset that the PR4 incentives for the TSO and TAO

were not turned off during 2016 and 2017 (unlike for the DSO/DAO). Performance

against the System Minutes Lost (SML) and System Frequency (SF) incentives will

therefore still be measured for the TSO for 2016 and 2017, using the targets set out in

this consultation. Any new incentives introduced in this consultation will only take

effect from 2018.


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1.3 Purpose of this Consultation

The purpose of this document is to set out and seek views on proposals for the

reporting and incentives arrangements to apply for the remainder of the PR4 period.

The objective is twofold. First, to improve outcomes for electricity customers and

market participants during the PR4 period. Second, to create a robust platform for the

continuing development of reporting and incentives for PR5 and beyond.

1.4 Related documents

Further background relevant to this consultation document can be found in the

following documents:

CER/15/295 Decision on DSO Distribution Revenue for 2016 to 2020

Decision Paper

CER/15/296 Decision on TSO and TAO Transmission Revenue for 2016 to 2020

Decision Paper

CER/10/206 Decision on TSO and TAO transmission revenue for 2011 to 2015

Decision Paper

CER/10/198 Decision on DSO distribution revenue for 2011 to 2015

Decision Paper

1.5 Structure of this document

The first half of this document sets out proposals relating to Transmission. This

covers EirGrid as TSO, and ESB Networks as TAO. Proposed changes to the

reporting framework are set out in Section 3 and the proposed incentive framework

is described in Section 4. Sections 5 and 6 follow the same structure, for Distribution

– and only relate to ESB Networks.

For each area covered, we describe the issue being addressed and the action we

propose to take. We then summarise the supporting reasoning. In developing these

proposals, CRU has analysed performance under the PR3 framework, reviewed

practice in other relevant jurisdictions, and engaged with EirGrid and ESB Networks.

Specific questions for consultation can be found at the end of Sections 3-6. A

https://www.cru.ie/wp-content/uploads/2015/07/CER15295-Decision-on-DSO-PR4-Distribution-Revenue-2016-to-2020.pdf

https://www.cru.ie/wp-content/uploads/2015/07/CER15295-Decision-on-DSO-PR4-Distribution-Revenue-2016-to-2020.pdf

https://www.cru.ie/wp-content/uploads/2015/07/CER15296-Decision-on-TSO-and-TAO-Transmission-Revenue-for-2016-to-2020-1.pdf


https://www.cru.ie/wp-content/uploads/2010/07/cer10206.pdf





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complete list of questions can also be found at Appendix 5. A summary of how CRU

has identified and used relevant experience from other jurisdictions is set on in

Appendix 1.

1.6 Responding to the CRU

This consultation document is for the attention of all stakeholders who have an interest

in understanding how EirGrid and ESBN’s performance is monitored and reported on,

and how revenues should flex to reflect levels of performance in certain specified

areas of activity.

The CRU welcomes comments on this consultation to be submitted via email by

Friday, 26 January, close of business, to [email protected].

All responses will be published on the CRU’s website unless marked as confidential.

mailto:[email protected]


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2. Context

In this section, we describe the industry structure, the role of reporting and incentives

in the economic regulation of networks, and how it had been given effect during the

PR3 period.

2.1 Industry structure

The PR4 Decision covers two companies, and three distinct roles. In summary, the

different roles and responsibilities are:

Transmission System Operator (TSO) – EirGrid: The physical operation of

the transmission system in real-time, including the procurement of system

services; the planning of extensions and reinforcements to the transmission

network, and associated interactions with the TAO; the offering of rights to

connect to and make use of the transmission system.

Transmission Asset Owner (TAO) – ESB Networks: The owner of the

transmission network, and the party who builds additional transmission

infrastructure or replaces assets at their end of life at the direction of the TSO,

and maintains the existing network.

Distribution System Operator and Asset Owner (DSO/DAO) – ESB

Networks: Responsible for the physical operation of the distribution system;

the planning and delivery of extensions, renewal and reinforcement of the

distribution network; maintenance, repair and supply restoration of the existing

network; the offering of rights to connect to and make use of the distribution

system.

2.2 The role of reporting and incentives

The key task for the economic regulation of regulated monopolies such as EirGrid and

ESBN is to align the interests of the regulated businesses more closely to the long-

term interests of customers. There are a variety of methods used by regulators to

pursue this objective.

The Price Review process determines how much revenue each licensee is permitted


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to recover for a 5-year period. The allowances are set to enable each licensee to

recover efficient operating and capital costs, including a reasonable return on capital.

Companies can earn additional returns (for a limited time) by “beating” the cost

forecasts used in setting the allowance. Cost saving are then shared with customers

through lower charges.

Reporting requirements complement the “core” incentive to minimise costs in the

short-term. By giving visibility to what each company is delivering, there is less

potential for companies to boost short-term returns by reducing quality, or storing up

problems for the future by deferring necessary investment or maintenance. Incentive

mechanisms go a step further by attaching additional rewards or penalties to specific

reported measures of performance.

There are also wider informational benefits to use of reporting and incentives. They

increase understanding by network users and other stakeholders on how EirGrid and

ESBN are performing – which in turn improves accountability. Data generated through

reporting and incentives also helps to inform the more detailed cost assessments and

forecasts involved in future price review.

2.3 PR3 reporting and incentives

Under PR3, the TSO, TAO and DSO/DAO were subject to a range of financial

incentives, which resulted in reward or payment during the price review period. The

PR3 incentives have been the starting point for the PR4 incentive packages presented

in this consultation. Future behaviour and incentive targets have been calibrated with

historical performance to ensure continued improvement in service provision for

consumers.


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Table 1 TSO and TAO incentives and performance under PR3

Incentive Description and PR3 performance

TSO – EirGrid

Transmission System Performance

- System Minutes Lost2 Measure of minutes lost per year (planned and unplanned). <1.5 minutes per year target met in all year of PR3.

- System Frequency Measure (percentage) of network frequency, between the limits of 49.9 Hz and 50.1 Hz. Frequency target (96%) met in all years of PR3.

Transmission System Development

- TSO Project Milestones Incentive for successful completion of project milestones for pre-defined projects. The TSO received positive payments every year under this incentive during PR3.

- Delivery of Enhanced Network Capacity

Demonstration of benefits of network solutions, using cost-benefit analysis to quantify benefits delivered in previous periods.

TAO – ESBN

Transmissions System Development

- Issue PIP Incentive for successful completion of project milestones for pre-defined projects. The TAO received positive payments under this incentive during PR3.

- Scheduled outages Incentive linked to difference between planned and actual outage days (where subject to TAO control). The incentive resulted in payments to the TAO each year under PR3.

- Construction and Energisation Incentive linked to spend against agreed PR3 budget submission. Full incentive payment received each year in PR3.

2 “System Minute Lost is a measure of the energy not supplied for a disturbance. The metric takes account of the load lost (MW), duration of disconnection (Minutes) and peak system demand (MW), to allow for historical comparison. For example, if 300 MW were lost for 10 minutes and the system peak was 3000 MW, this would represent one System Minute. System Minutes = (Load MW x Duration mins) / (System Peak MW) = (300 x 10) / 3000 = 1” – Source - All-Island Transmission System Performance Report 2015

http://www.eirgridgroup.com/site-files/library/EirGrid/AITSPR2015_FINAL_TO_RAS.pdf


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Table 2 DSO/DAO incentives and performance under PR3

Incentive Description and PR3 performance

Continuity of supply Customer Minutes Lost (CML) – duration of interruptions Customer Interruptions (CI) – frequency of interruptions. Target met in 2 of the 5 years in PR3.

Overall customer satisfaction survey3

Measure of customer perception of ESBN services (measured through a customer survey). 74% target met every year in PR3 (average performance of 81.6%).

Customer satisfaction Measure of speed of telephone response, abandonment rate, mystery caller, call back survey and call referral rate. Overall target rate of 85.3%, met every year in PR3.

Metering Meter reading targets: 98% of meters should have 1 reading per year, and 99% of meters will not have back to back block estimates. Targets met in all but 1 year in PR3.

Worst served Customer €10m fund available to improve services to customers experiencing large number of interruptions.

2.4 CRU’s objectives for PR4

As part of the PR4 final decisions (2015) for the TSO, TAO and DSO/DAO PR4, the

CRU committed to consult on the incentive packages for PR4 (see Section 1.4 for

document links). At the time, we commented that a number of existing incentives,

applicable during PR3, remained relevant for PR4. In addition, we identified areas

where significant review was required before the full incentive packages could be

introduced.

For the DSO/DAO (Ref CER/15/295), we committed to consider:

Incentives relating to continuity of supply,

An incentive to improve service of the DSO’s ‘worst served customers’,

Incentives relating to the quality of service provided by the DSO customer call

centre and an overall customer satisfaction incentive,

Incentives to reduce the level of electrical losses on the distribution system,

3 More Commonly known as the RedC survey


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An incentive relating to the DSO’s meter reading for non-quarterly-hour

metered customers,

An incentive relating to the connection of renewable generation,

Other items for which there are no financial rewards/penalties, but which do

nevertheless encourage the DSO to maintain or improve its performance,

The introduction of a Strategic Innovation Fund for the DSO.

For the TSO and TAO (Ref CER/15/296), we committed to:

Carry out a review of the incentive mechanism that currently applies to the

TSO and TAO in relation to service delivery and targets,

Put in place strategic incentives separately to incentives focused on

operational and service level targets,

Consult on the objectives against which the incentives would be assessed

and the details of the mechanism itself (noting that objectives should be time

limited, clearly measureable, and be a strategic objective related to the TSO’s

role in the transition of the system to one with a large penetration of

renewable energy).


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3. Transmission – reporting

In this section we set out and invite views on proposals for reporting that will apply to

EirGrid as TSO and ESBN as TAO, for the period 2018 to 2020. In developing these

proposals, the CRU is also seeking to put in place arrangements that can endure,

subject to review and refinement as part of the PR5 process.

3.1 Output-based reporting

Objective

CRU’s objective in revising the framework of reporting for Transmission is to increase

transparency for all stakeholders on what is being delivered over time by the TSO and

TAO in return for the revenues made available through the Price Review. Further, to

ensure that relevant information is easy to access and interpret – and capable of

adapting over time to continue to ensure reporting on the full range of ways in which

actions by the TSO and TAO impact stakeholders.

Without a robust framework for reporting, there is a risk that consumers, stakeholders

and CRU cannot easily discern how the TSO and TAO are performing – and hence

are less able to hold the TSO and TAO to account, or understand the levels of

performance that it is reasonable to expect the TSO and TAO to deliver. This could,

over time, constrain the quality of regulatory decision-making on behalf of consumers.

Proposal 1

CRU is proposing a new reporting framework for Transmission with two component

parts, which together – along with changes to capex monitoring – represent a material

change to current arrangements. The two component parts are described in turn

below.

a. A consolidated TSO/TAO Annual Performance Report (APR)

We propose to facilitate a consolidated APR covering all aspects of Transmission.

This would replace the current arrangements under which reports are produced and

published separately by the TSO and by the TAO.

b. Updated rules on the format and content of the APR

We proposed to re-state the required format and content of the APR, to make it more


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useful and accessible to stakeholders. This will be given effect by CRU setting new

principles for the APR4, and for the TSO and TAO to undertake a review of changes

needed to meet the new principles. The finding of these reviews would be considered

for approval by CRU, and then reflected in the APRs for 2017 (expected to be

published in mid-2018).

The updated principles proposed by CRU are designed to ensure that the APR is

updated to make its content more comprehensive and relevant, and to make its format

easier for stakeholder to access the information. Draft principles are set out below,

with further detail provided in Annex 2.

Reasoning

CRU has come forward with this model based on analysis of how the current

arrangements perform, and might be expected to continue to perform, against the

objective above, and taking into account background research into how output-based

reporting is given effect in other relevant jurisdictions.

The key documents in the current framework are the APR prepared by the TSO, and

the APR prepared by the TAO. Collectively, these documents should provide a broad,

accessible summary of performance. But in practice, there are weaknesses and

limitations:

The two documents are prepared separately, and do not reference each

other. It is not “joined up” for a stakeholder who might be interested in

understanding performance of the transmission sector overall. It should also

be noted that the TSO report is prepared as a joint document with SONI to

provide an all-island view, with separate sections for EirGrid and SONI.

The TSO document is not particularly visible or easy-to-access on its website,

and has a “look-and-feel” consistent with a regulatory submission. This

contrasts with other documentation, such as the EirGrid Annual Report –

which are much more accessible and engaging for the reader.

4 Pursuant to Condition 18 of the TSO licence and Condition 11 of the TAO licence.


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While the TSO report is relatively lengthy at around 75 pages (including

appendices), of which over 30 pages relate directly to EirGrid’s performance

as TSO, the information contained is relatively superficial and uninformative

from the perspective of a reader wanting to understand whether the TSO was

performing well or not. Two examples from the 2016 Report:

o First, the section on grid development is a bullet-point list of fourteen

capital projects which were reported as being completed in 2016.

There is no information on whether these projects were completed on

time or to budget, what impacts these delivered projects have on

market participants or consumers in terms of supply reliability or the

ability to participate in the market, or why these projects represent an

efficient response to an identified need. Hence, only a very narrow

perspective on performance is provided.

o Second, the section on connection reports that 5 new demand

connection offers and 1 new generation connection have been

executed in 2016, and that there has been a “significant increase” in

the work done to modify connection offers. It also reported that 0 new

demand connections, and 3 new generation connections comprising

154 MW of capacity have been energised. It is difficult to see what a

reader could infer about the quality of TSOs performance in respect of

connection from this information, even if the reported information was

compared to reports from previous years.

The limitations in the reporting of TSO’s delivery of new connections

represents a significant gap, whereas better reporting could improve

accountability and the strength of “reputational” incentives on the TSO to meet

the needs of prospective network users.

The choice of formatting and language, and the extent to which information

and data are provided to help understand the broader context for

performance, is not fit for the purpose of helping a reader understand and

access information easily. This applies to the reports prepared by the TSO

and by the TAO.


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3.2 Capex monitoring

Objective

CRU’s primary objective in revising the framework of capex monitoring is to increase

its own capacity to understand the processes that result in transmission investment,

and hence better protect customers from the risks and costs of inefficient investment.

Regulatory reporting is a core function of any regulatory price review process. It

allows regulators to monitor the progress of regulated companies during the price

review, in reconciliation at the end of the review, and as a key input to the next review.

Effective reporting helps to overcome the asymmetric information problem inherent in

monopoly regulated network industries – including by helping networks users and

other stakeholders better understand, and engage with, plans for how the network is

being developed.

Proposal 2

CRU proposes a new approach to capex monitoring which has three component parts,

which collectively will support a broader and more accessible view on how the TSO

and TAO, collectively, plan and deliver investment in transmission infrastructure:

a. Broadening the range of reported activities

We propose to increase the scope of reporting to include all elements of the

investment planning and delivery process. Reporting currently focusses on progress

against milestones for the ‘live’ list of transmission projects. We propose to extend the

scope of reporting to also include how the need for investment is assessed and

quantified, and how options are identified and evaluated – and the optimal option

identified.

b. From quarterly to annual

We propose to change the frequency of submissions on capex progress from the TSO

and TAO to CRU. Currently, data is submitted to CRU quarterly. We propose to

move to an annual submission of data and supporting commentary, across the

broader range of activities identified in point a. above.

c. An annual Investment Planning and Delivery Report (IPDR)

We propose to oblige the TSO and TAO to produce, jointly, a consolidated summary

report on investment planning and delivery for external stakeholders. This will, in


13

effect, be a companion document to the new, consolidated APR. Currently, summary

information derived from the data submitted to CRU is not routinely published.

Reasoning

The key reasoning for the proposed changes to capex reporting and monitoring can

be summarised as follows:

Quarterly, project-level data is unnecessarily detailed. There is a risk that

provision of such frequent, detailed data blurs or dilutes the primary

accountability of the TSO and TAO for investment planning and delivery

decisions. There are also the administrative resources involved for the TSO,

TAO and CRU in processing but not routinely using these data. This has both

an absolute cost and an opportunity cost, i.e. resources could be deployed in

other regulatory activities with potentially greater benefits for consumers.

While the focus of the current arrangements could be view as too detailed, it

could also be challenged as too narrow. There is little formal reporting to the

CRU on why the specific mix of transmission project represents the right set

of projects – including how the precise need for enhancing transmission

capabilities has been identified, and on how different options for meeting

those needs have been identified and evaluated. Arguably, it is this

information that is more relevant and useful to understanding whether the

transmission network is being developed economically and efficiently.

There is evidence in other jurisdictions of arrangements that provide much

greater transparency on needs and options working effectively in practice5.

Both as a mechanism for enabling stakeholders to engage actively in the

investment planning process, and as a means of supporting better informed

decision-making. The rules for investment planning in Australia’s National

Electricity Market (NEM), and the manner in which the active consideration of

alternative, non-network solutions is supported, is a case in point.

5 A summary of our analysis of other jurisdictions is provided in Annex 1


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3.3 Capex adjustment process

Objective

CRU’s objective in tightening up the mechanism for adjusting capex allowances during

a price review period is to provide flexibility in response to significant new information,

and hence avoid delays to necessary investment – but without diluting the incentives

on the TSO and TAO to manage costs efficiently.

The nature of PR4, and all regulatory price controls, is that investment funding is

provided in expectation of what will be required. Market developments may however

result in the efficient level of investment being very different to what was expected. An

adjustment mechanism is intended to address the situation where the differences are

so large as to risk delaying necessary investment, or placing unreasonable financial

demands on the TSO or TAO (or on consumers, e.g. if capex allowances were set

much higher than was later seen to be needed).

Proposal 3

CRU proposes to introduce a formal mechanism through which an application to re-set

allowances can be triggered in specified circumstances. The mechanism has the

following features (with the dates and parameters in parentheses being for illustration,

with views invited):

Either the TSO, TAO or CRU may trigger the process, on or before [31st

March] in any given year.

The process may only be triggered if there has been a material change in

circumstances (relative to when the capex allowance was originally set) such

that either: (a) the total capex allowance for the 5-year PR period is likely to

be breached by more than [10%] in the next calendar year; or (b) there is a

high likelihood that the total capex allowance will be underspent by more than

[20%] by the end of the 5-year PR period.

The event triggering the process will be either: (a) a submission to CRU by

the TSO or TAO setting out in detail the nature of the material change, and its

net impact on the level of capex and opex over the remainder of the PR

period; or (b) a determination by the CRU requesting a submission by the

TSO or TAO, and citing the nature of the material change to be costed.


15

CRU will consult on the application, and may subsequently issue a decision to

modify the allowances for capex and opex used for the purposes of setting

tariffs.

This proposed process replaces the current scope for ad hoc adjustments to be

considered and made.

Reasoning

The key reasoning for the proposed changes to the capex adjustment process can be

summarised as follows:

It is appropriate to have some flexibility to revisit allowances in the light of

significant new information, and this should allow for the fact that the new

information might reveal the allowances to be significantly higher or lower

than expected. Without such flexibility there is a risk that efficient and

necessary investment cannot be made, or that current consumers are making

payments “on account” for assets that are not going to be built. Further, a

degree of formality of how this process will operate increases regulatory

certainty, and provides a more transparent and regime for stakeholders. For

example, by affording stakeholders an opportunity to be consulted on the

need for, and value of, adjustments to capex allowances.

But there should be a “high bar” to trigger such a mechanism, to avoid diluting

the incentives on the TSO and TAO to manage their costs efficiently under the

allowances that have been set. Further, if the allowances are to be re-

opened, then the impacts should be considered broadly – recognising that

material changes in capex drivers could have direct and indirect impacts on

the overall capex programme, and might also impact on opex6.

3.4 Consultation question

6 For example, a change in circumstances that means that replacement capex needs to be accelerated could also have a reducing impact on maintenance costs over the period. If such second-order impacts were not recognised, then the adjustment to allowances could be too high (or low).


16

1. Do you have any comments on Proposals 1-3 and CRU’s supporting

reasoning, including but not limited to the following aspects:

a. The objective of a more comprehensive, user-friendly joint TSO/TAO

performance report, and how best to meet it; and

b. The rationale for a companion summary report each year on investment

planning and delivery.


17

4. Transmission – incentives

In this section we set out and invite views on proposals for incentive mechanisms

applying to EirGrid as TSO and ESBN as TAO, for the PR4 period.7 In developing

these proposals, the CRU is also seeking to put in place arrangements that can

endure, subject to review, refinement and updating as part of the PR5 process.

The CRU’s overarching objective in proposing these mechanisms is to ensure that

incentives are targeted on the TSO and TAO behaviours that can make the most

positive difference to network users and consumers. Further, that the performance

targets against which the TSO and TAO are incentivised are based on the most

appropriate and up-to-date data.

The proposals have also been calibrated such that, in aggregate, the financial

exposure for the TSO and TAO is consistent with the PR4 Decision. For the TSO, this

translates to 4% of internal opex; for the TAO this translates to 5% of allowed opex.

4.1 System performance – TSO

Objective

CRU’s objective in putting in place an incentive mechanism for system performance is

to give the TSO an appropriate financial stake in maintaining appropriately high

standards of system performance. It reflects that customers and market participants

place a high value on supply reliability and quality, and that the actions of the TSO can

be a significant influencing factor on outcomes.

Proposal 4

CRU proposes to retain the PR3 structure of incentives, with target levels of

performance for System Minutes Lost (SML) and System Frequency (SF), updated for

new information. We also propose to retain the share (40%) of the total TSO incentive

7 The PR4 incentives for the TSO and TAO were not turned off during 2016 and 2017 (unlike for the DSO/DAO). Performance against the SML and System Frequency incentives will therefore still be measured for the TSO for 2016 and 2017, using the targets set out in this consultation. Any new incentives introduced in this consultation will only take effect from 2018.


18

pot allocated to system performance.

The mechanism is proposed to have the following features:

As for PR3, an annual reward of up to 0.8% of TSO internal opex per

incentive.

As for PR3, an annual penalty of up to 0.8% of TSO internal opex per

incentive.

Targets for SML and SF based on average actual performance over the past

five years. See Annex 2.

Retention of the same structure of caps, collars and dead-bands around the

target levels of performance as adopted in PR3.

Reasoning

The key reasoning for the proposal can be summarised as follows:

System Minutes Lost and System Frequency are well-recognised, robust

ways of measuring the reliability and quality of supply delivered by an

electricity transmission system. The metrics are proximate to outcomes that

users of the transmission system place a high value on. The use of standard

metrics also allows the TSO’s performance to be understood over time, and

relative to other jurisdictions.

The structure of incentives used in PR3 has proven to be workable in practice,

and consistent with delivering high levels of performance, and trend

improvements. The value of the incentive pot for PR3 appears to be

reasonable and proportionate, relative to other potential uses for incentives.

The symmetric nature of the scheme means that strong performance is

rewarded and poor performance is penalised, and increments in performance

are valued at the same rate.

Updating of the target levels of performance to make use of recent data

means that the benefits of past performance improvements by the TSO are

shared with network users. Without this recalibration of targets, there would

be the potential for windfall gains (or losses) for the TSO.


19

The CRU is also considering whether an improvement factor should also be

built in. Existing performance levels are very high, and the scope for further

performance improvements might be marginal. However, the principle of

continuing improvement should also be recognised in setting incentives. CRU

will revisit this aspect of the incentive design in the light of consultation

responses, and following further engagement with the TSO.

4.2 Investment Planning and Delivery – TSO

Objective

CRU’s objective in putting in place an incentive mechanism for investment planning

and delivery is to improve transparency over the efficiency with which these key

processes are undertaken. Further, to give the TSO a proportionate financial stake in

maintaining consistently high standards in what these processes deliver. It reflects the

fact that the TSO has significant discretion over investment planning and delivery, and

these decisions ultimately (and cumulatively) have a significant impact on network

performance and customers bills’.

Proposal 5

CRU proposes to replace the structure of incentives used during PR3, while retaining

the share (60%) of the incentive pot allocated to TSO behaviour associated with the

delivery of investment and provision of network capacity. The new mechanism will

have the following features:

An annual “balanced scorecard” assessment of the efficiency and rigour of the

TSO processes for (i) identifying the need for additional network capacity, (ii)

identifying and evaluating different technical and commercial options for

meeting identified needs, and (iii) supporting the delivery of investment

projects to increase or maintain network transfer capabilities.

The assessment will be undertaken by an independent auditor with

appropriate technical and commercial expertise. The auditor will be funded by

the TSO, but will report to both the TSO and CRU – using a framework and

criteria approved by CRU, following consultation with the TSO and other

stakeholders.


20

A grading of “strong”, “adequate” or “weak” determined by CRU on the basis

of the auditor’s report and any other evidence considered relevant by CRU.

A reward for “strong” performance of 2.4% of TSO annual internal opex for

2018, 2019 and 2020; A reward for “adequate” performance equal to the

reasonable cost of the audit; A penalty for “weak” performance of 2.4% of

TSO internal opex8.

The mechanism described above will replace the PR3 “Project Milestones” incentive

and “Delivery of Enhanced Network Capacity” incentive mechanisms, with effect from

2018.

Reasoning


Analysis undertaken by CRU’s independent consultants as part of the PR4

process raised significant concerns about the structure of incentives used

during PR3, and questioned whether there was a disjoint between rewards

under the scheme and a broader assessment of the timeliness and efficiency

with which necessary transmission investment was being planned and

delivered.

While the TSO did not necessarily accept this analysis, it is the case that the

PR3 scheme is partial in nature – by focusing only on whether milestones for

the currently “live” list of transmission projects are being met. This approach

does not incentivise, for example, the analysis of the need for investment, or

the choice of option to meet that need. By implication, this means that the

TSO could be rewarded under the scheme even if the “wrong” mix of projects

was being delivered. The focus on project milestones is not sufficiently

proximate to the outcomes that matter, i.e. a transmission network that is

optimised to meet the needs of current and prospective network users, at

efficient cost to customers.

8 Less the reasonable cost of the audit.


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Analysis undertaken by CRU’s PR4 consultants also highlighted concerns

about the practicalities of the Project Milestones and Delivery of Enhanced

Network Capacity incentives. For example, the rolling nature of the list of

projects against which progress was assessed – and the role of the TSO in

formulating this list. In effect, there was a concern that the TSO could be

perceived to be “setting its own exam”.

CRU recognises that while the proposals address the concern about the

current incentive mechanism being too partial in scope, it does introduce more

subjectivity into the assessment of the TSO’s performance. The use of an

independent auditor working to a “scorecard” that is developed following

consultation between the TSO, CRU and other stakeholders is designed to

mitigate this concern. CRU considers that the key elements of (i) identifying

need, and (ii) developing and evaluating options, are amenable to objective

assessment through choice of an appropriate set of KPIs.

CRU is open to considering a more granular scoring scheme than

“strong/weak/adequate”, and would welcome views on this aspect of the

incentive scheme. A wider range of outcomes for the TSO might enable

performance to be rewarded or penalised more accurately. But, it might also

introduce more subjectivity in the mapping of evidence to one side or another

of a performance boundary.

4.3 Project delivery – TAO

Objective

CRU’s objective in putting in place an incentive mechanism for project delivery by the

TAO is to give the TAO a proportionate financial stake in the efficient and timely

implementation of the TSO’s investment plans. While the role of the TAO is narrower

than the TSO’s in the sense that it does generate the investment plans, the TAO’s

efficiency and timeliness in delivery can have significant impacts for market

participants and customers.

Proposal 6

CRU is considering one of the following two approaches.


22

The first option is to incorporate the assessment of TAO project delivery into the

“balanced scorecard” approach for investment planning and delivery outlined in

Section 4.2 above. This would have the following characteristics:

The performance of the TAO and timely and efficient delivery of projects

would be audited annually against pre-defined criteria – and a report

submitted to CRU.

The report would form the basis for an overall TAO assessment by CRU of

“strong”, “adequate” or “weak”.

“Strong” performance would translate to a reward equivalent to 4.1% of

annual allowed opex for 2018, 2019 and 2020. This retains the maximum

upside of the corresponding project milestones incentive mechanisms from

PR3; “Weak” performance would translate to a penalty equivalent to 4.1% of

allowed opex.9 This retains the maximum downside of the corresponding

project milestones incentive mechanisms from PR3; “Adequate” perform

would translate to an award equivalent to the reasonable cost of the audit.

The second option is to retain the PR3 approach, which links rewards or penalties to

(i) the timeliness with which the TAO issues each required Project Initiation Plan (PIP),

and (ii) the extent to which the TSO carries out the works it is scheduled to carry out in

the construction and energisation of new transmission infrastructure.

Reasoning


The role of the TAO within the framework of investment planning and delivery

is much narrower that the TSO, and has less discretion. In broad terms,

responsibility for investment planning sits with the TSO, and the TAO’s role is

to build the projects defined by the TSO as necessary. Hence, incentives

linked to meeting milestones or planned expenditure on individual projects

might continue to be appropriate.

9 Less the reasonable cost of the audit.


23

However, the move to an audit-based approach to support a broader, less

mechanistic approach to assessing performance – which could on balance be

more accurate. While meeting milestones and expenditure plans for identified

projects will continue to be relevant (and significant) in a TAO “scorecard”, the

audit approach does allow for other relevant metrics or evidence to be

considered also.

One specific concern about the PR3 arrangements is the extent to which the

mechanism creates sufficiently strong incentives on the TAO to facilitate new

connections. CRU recognises that many factors can influence the date at

which a new generation project is able to connect and participate in the

wholesale market, only some of which are within the control of the TSO or

TAO. However, it is important to use incentives effectively as a means of

rewarding (or penalising) the TSO that make a difference to the number and

type of generators able to participate in the wholesale market (and contribute

to wider policy goals, e.g. relating to renewables) at any given time.

The CRU is open to considering a more granular scoring scheme that

“strong/weak/adequate”, and would welcome views on this aspect of the

incentive scheme. A wider range of outcomes for the TSO might enable

performance to be rewarded or penalised more accurately. But, it might also

introduce more subjectivity in the mapping of evidence to one side or another

of a performance boundary.

4.4 Outage management

Objective

CRU’s objective in putting in place an incentive mechanism for the management of

outages by the TAO is to give the TAO a proportionate financial stake to minimise the

total net costs associated with the agreed outage plan, having regard to its own costs

and costs imposed by outages on the TSO and market participants. It reflects that at

times there can be a tension between the least cost outage plan for the TAO, and the

least cost outage plan for the system as a whole (and, by extension, consumers).

Proposal 7

CRU proposes to retain the core mechanism that has been in place during PR3, while


24

also introducing greater scope for flexibility where short-term changes in outage plans

can be agreed between the TSO and TAO. The two components of the proposed

incentives are:

A mechanism to reward the TAO for meeting the 3-weekly outage plans

published on the TSO website. This is, in effect, the continuation of the

mechanism that has been in place during PR3:

o A baseline level of outage days consistent with each 3-weekly outage

plan;

o Three performance bands relative to this baselined level

o If actual outage days are not more than 5% higher than the baseline,

then the full incentive payment is received

o If actual outages days is between 5% of 10% over the baseline level,

then a partial incentive payment is received

o If actual outage days total is more than 10% over the baseline level,

then no incentive payment is received.

A “use-it-or-lose it” allowance to fund, by agreement with the TSO, actions to

reduce the duration or timing of planned outages at short-notice. This is a

new feature:

o The option for the TSO to request at short notice a variation to the 3-

weekly outage plan to reduce the duration and/or amend the start date

o An incentive payment for the TAO equal to the reasonable costs

incurred by the TAO in meeting the request plus an uplift of [25%], for

each request accepted and met.

Collectively, these two mechanisms will account for 17% of the total TAO

incentive pot, equal to 0.85% of annual allowed opex (consistent with PR3).

The appropriate allocation between the two elements will be determined in

light of consultation responses, and further engagement with the TSO and

TAO.

Reasoning



25

The joint management of outages by the TSO and TAO is an important

process that has potentially significant impacts on market participants and

consumers. Efficient design and delivery can help minimise network

maintenance costs, constraint costs and supply interruption risks. Hence, in

principle it is an appropriate activity to incentivise.

The focus on incentivising the TAO to meet the rolling plans agreed with the

TSO remain relevant and useful, recognising the risks associated with the

TAO only being rewarded if it beat the target for outage days.

By adding flexibility for the TSO and TAO to work together to agree short-term

variations to the outage plan which are both value-creating for the market and

can be accommodated by the TAO at reasonable cost, CRU considers that it

is increasing opportunities for beneficial outcome for customers. Further, it is

reasonable to permit the TAO to retain a share of the realised benefits

through the proposed “cost uplift”.

It should be noted that the framework also places an obligation on the TSO to

make efficient choices on when to request a variation, and whether to take up

the offer made by the TAO. The value-for-money of this arrangement will be

monitored over time, and will be a factor in determining whether this type of

scheme continues beyond PR4.

4.5 Stakeholder engagement

Objective

CRU’s objective in putting in place an incentive mechanism for stakeholder

engagement by the TSO is to enable the potential benefits of effective stakeholder

engagement to be realised in practice. It reflects that innovation in how stakeholders

are communicated with, and how their input is used to improve how network services

meet the needs of stakeholders has significant potential value, but is inherently difficult

to quantify. Hence, without an incentive mechanism there is a risk of “under-

investment” in stakeholder engagement.

Proposal 8

The stakeholder engagement incentive will be common across the DSO, TSO and

TAO. This will give CRU the option to compare methods, engagement, and outcomes


26

between network companies. The CRU will place an obligation on the network

companies to put in place a stakeholder engagement strategy, to be reported on

annually. The annual report should include submission of evidence to demonstrate

effective and successful engagement.

The annual stakeholder engagement submission will be assessed by CRU. To ensure

a balanced assessment of consumer needs and engagement, the CRU may

complement its own evaluation with input from input from other parties, e.g. a

stakeholder panel or panel of independent experts. Through this process, CRU will

assess merits of the stakeholder engagement strategy, the delivery of the strategy

over the preceding year, and the implementation of methods to improve stakeholder

engagement in future.

The stakeholder engagement incentive will be reputational in year 1 (2018), with no

financial reward or penalty associated with performance. The results of the CRU

assessment may include insights from the stakeholder engagement panel, will be

published.

Following the first assessment year, the CRU will consider whether a financial

incentive should be introduced for the stakeholder engagement incentive. Any

financial value attached to this incentive will be re-distributed from the other DSO

incentives, therefore maintaining the total incentive value at risk/reward under PR4.

Reasoning


The intention of the new stakeholder incentive is to provide a clear framework

for the CRU to assess the measures taken by the TSO, and the other network

companies, to understand and address the needs of stakeholders – in an

environment in which the energy sector, and hence what different

stakeholders might need, is in a process of transformation.

A consistent assessment approach across network companies will give both

the CRU and the network companies the opportunity to learn from industry

good practice and continually improve engagement methods. It also provides


27

a platform for the network companies to demonstrate their efforts and success

in these areas.

Stakeholder engagement benchmarking is an approach that Ofgem has

developed as part of the RIIO package of price control incentives (specifically

the Stakeholder Engagement (and Consumer Vulnerability) Incentive).10

Ofgem employ a panel to advise on DNO performance, based on a set of pre-

defined objectives. The limited number of network companies in Ireland

reduces the competitive pressure compared to GB. The consistent

application of the CRU’s stakeholder engagement incentive across all network

companies will go some way to address this.

The “reputation only” status in year 1 will provide an environment in which the

assessment framework can be developed and tested collaboratively with the

network companies, and stakeholders before any revenue is put “at risk”. The

expectation, however, is that the quality of stakeholder engagement will be

subject to financial incentives at some point. In a period of rapid energy

sector change, it is important that the TSO, TAO and DSO/DAO prioritise how

they communicate to, and work with, stakeholders.

4.6 Delivering against strategic objectives

Objective

CRU’s objective in putting in place a strategic incentive is to create a mechanism to

allow the TSO to retain a share of the value to the market (and, by extension

customers) if the TSO outperforms what might reasonably be expected in specified,

strategically important areas. There areas relate, in various ways, to the ability of

different parties to participate in the markets for energy, capacity and system services.

Proposal 9

The mechanism is calibrated around a total value of €5m, spread evenly across each

10 Information on Ofgem’s website: https://www.ofgem.gov.uk/publications-and-updates/direction-issuing-stakeholder-engagement-and-consumer-vulnerability-incentive-guidance-riio-ed1

https://www.ofgem.gov.uk/publications-and-updates/direction-issuing-stakeholder-engagement-and-consumer-vulnerability-incentive-guidance-riio-ed1

https://www.ofgem.gov.uk/publications-and-updates/direction-issuing-stakeholder-engagement-and-consumer-vulnerability-incentive-guidance-riio-ed1


28

of the years 2017 to 2020 – as per the PR4 Decision. It will have the following

features:

The TSO will make an annual application to CRU, supported by evidence.

The evidence will set out how (and to what extent) its actions in the calendar

year have accelerated the following:

o The implementation and efficient operation of ISEM,

o The allocation of non-firm access rights to new generation,

o The upgrading of access right from non-firm to firm,

o The participation on the demand-side in the provision of services,

o The dynamic adjustment of permitted transfer capabilities in

circumstances that would otherwise cause constraints,

o The ability to accommodate an increasing proportion of non-

synchronous generation within the total generation mix.

If in the view of the CRU the evidence is consistent with the accelerated

delivery of high-value outcomes for the market and consumers, then the

incentive payment for that calendar year will be provided for in the CRU’s

setting of transmission tariffs.

If in the view of the CRU the evidence is reflective of performance that could

have reasonably been expected, given the TSO pre-existing obligations and

revenue allowances, then the incentive payment for that calendar year will not

be provided in the setting of tariffs.

The CRU reserves the right to consult prior to forming a view, based on the

evidence submitted by the TSO.

Reasoning


The power system that that TSO is operating, and the market arrangements

which sit alongside that power system, are in a period of rapid change. The

TSO has a key role to facilitate and manage this process change, and in

some areas actively leading it. Further, it is difficult to define specific KPIs

that will accurate and comprehensively capture the quality of the TSO’s

performance in this regard. However, the value at stake for the market and


29

for consumers is significant. Hence, some form of incentive mechanism

appears to be appropriate.

Further, any incentive payment should be matched by demonstrable evidence

of delivering outcomes consistent with strong performance, in the areas that

matter to the market and consumers. In addition, the outcomes consistent

with such “performance bonuses” should be clearly over and above what

might reasonably have been expected under business-as-usual.

The proposed approach, based on an evidence-based assessment against

identified strategic objectives with a maximum incentive payment of €5m in

total, is in CRU’s view a reasonable and proportionate incentive for the TSO

to respond to.

4.7 Innovation

Objective

CRU’s objective in putting in place a more formal process is to track the use by the

TSO of innovation projects to help support and accelerate progress against the

strategic objectives. This process will also be a vehicle to consider the case for

additional funding for innovation projects, over and above the sums already provided

or adequately incentivised for under PR4.

Proposal 10

CRU propose a common approach across transmission and distribution to monitor,

and where appropriate incentivise, innovation by the TSO and DSO. It is based on

annual reporting on initiatives being progressed pursuant to an innovation strategy,

complemented by a layer of assessment by the CRU, where a case for incremental

funding is being made – or where assessment of the value-for-money of funded

projects is appropriate. In the context of the TSO, this translates to the following:

Annual submission: A report to the CRU on how available funding for

innovation has been used, with evidence on (i) projects being initiated, (ii)

projects that are in progress, and (iii) projects that have completed. In this

context, the CRU will expect evidence proportionate to the level of funding in

respect of:


30

o Systems and process that ensure that projects are sufficiently

innovative – and do not, for example, reflect business-as-usual

activities or projects to capture internal cost-savings through the

deployment of proven technology (which the TSO already has

incentives to deliver)

o How partnerships and external input are being used to shape

innovation projects and deliver of innovation projects

o How learnings are being transitioned into BAU activities, or the

specification of further innovation projects.

Potential for additional funding: The scope for the TSO to include, in its

report on innovation performance, a business case for additional funding for

new projects. This must include rationale for why the project is innovative, the

nature of the potential benefits at stake, and a description of how the project

will be managed, reported on and evaluated. If the application is accepted by

CRU, then reporting on progress will be folded into the proposed annual

process.

Reasoning


There are existing provisions under PR4 for the TSO to progress innovation

projects. While the funding is set at a relatively low level currently, it is still

important to have a degree of transparency over how this funding is being

used. The proposed approach is proportionate to this objective, and

consistent with the approach being proposed for the DSO.

The proposed approach also has the ability to flex if additional funding for

innovation is made available, either through the annual reporting process and

the submission of a business case by the TSO, or through the PR5 process.

The ability to increase the funding made available to the TSO ensures that

initiatives can be progressed quickly if a strong case can be made. But also

that there are sufficient safeguards in place when initiating new projects and

tracking progress over time to provide comfort for consumers that value-for-

money is being safeguarded.


31




a. The mix of new and retained incentive mechanisms, and how they relate

to the key areas of TSO and TAO behaviour for market participants and

consumers

b. The proposed change in the approach to setting incentives for

investment planning and delivery, based on assessment against a

broader range of criteria and evidence than under the existing

mechanism

c. The choice of key strategic objectives and associated outputs for the

TSO to be rewarded for exceptional performance.


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5. Distribution – reporting

In this section we set out and invite views on proposals for reporting applying to ESB

Networks as DSO/DAO, for the period 2018 to 2020. In developing these proposals,

CRU is also seeking to put in place arrangements that can endure, subject to review

and refinement as part of the PR5 process.

5.1 Output measures

Objective

CRU’s objective in revising the framework of reporting for Distribution is to increase

transparency for all stakeholders on what is being delivered over time by the

DSO/DAO in return for the revenues being made available. Further, to ensure that

relevant information is easy to access and interpret – and capable of adapting over

time to continue to ensure reporting on the full range of ways in which actions by the

DSO/DAO impact on stakeholders.

Without a robust framework for reporting, there is a risk that consumers, stakeholders

and CRU cannot easily discern how the DSO/DAO is performing – and hence are less

able to hold it to account, or understand the levels of performance that it is reasonable

to expect. This could, over time, constrain the quality of regulatory decision-making on

behalf of consumers.

Proposal 11

CRU proposes a new reporting framework for Distribution based on improving the

completeness, usefulness and accessibility of the existing Annual Performance Report

(APR). This approach will be applied consistently across both transmission and

distribution. The proposal as it applies to the DSO can be summarised as:

To re-state the required format and content of the APR, to make it more useful

and accessible for stakeholders. This will be given effect by CRU setting new

principles for the APR11, and for the DSO/DAO to undertake a review of

11 Pursuant to Condition 13 and 17of the DSO licence.


33

changes needed to meet the new principles. The finding of this review would

be considered for approval by CRU, and then reflected in the APRs for 2017

(published in mid-2018).

The updated principles proposed by CRU are designed to ensure that the

APR is updated to make its content more comprehensive and relevant, and to

make its format easier for stakeholder to access the information. Draft

principles are set out in Annex 2.

Reasoning

CRU has come forward with this model based on analysis of how the current

arrangements perform, and might be expected to continue to perform, against the

objective above, and background research into how output-based reporting is given

effect in other relevant jurisdictions.

The key document in the current framework is the APR prepared by DSO pursuant to

Condition 13 and 17 of its licence. This document should provide a broad, accessible

summary of performance. But in practice, there are weaknesses and limitations:

The document has the “look and feel” of a regulatory submission or

compliance document, rather than a document that might meet the needs of a

stakeholder seeking a clear, concise and comprehensive review of the

performance of the DSO in context.

Some aspects of DSO performance are reported in disproportionate detail,

while other areas where the performance of the DSO has significant impacts

on the market or consumers are reported in a relatively superficial manner.

While the CRU recognises that this reflects in part the historic development of

KPIs in different areas of activity, it also considers that the case for an update

to improve the completeness and usefulness of the APR is strong.

Some observations on the accessibility and usefulness of the DSO’s APR in

its current form:

o Relative to the TSO, the document itself is much easier to find on the

ESB Networks website. A section on Performance Reports is visible

on the landing page of the ESB Networks library, and this takes the


34

reader to an archive of all past reports starting with the most recent.

Although at the time of writing, the 2016 report was not present.

o Relative to the TSO, the document also provides more information for

the reader to understand performance in context, e.g. over time.

o However, as with the TSO, the reporting on how much network

investment has been undertaken, and why, is limited. There is a bullet

list of completed large projects, with limited commentary plus some

data tables on volume and value of investment in different areas. It is

difficult for the reader to understand whether this constitutes good

performance, or not, why these projects were needed, what benefits

they delivered, why they represented the most appropriate mix of

projects, and whether they were delivered on time and to budget.

o A significant proportion of the report is taken up with data tables in

respect of 44 individual Service Level Agreements (SLAs) relating in

various way to the quality and timeliness of metering-related services

provided to the market. While this is relevant information, it lacks

context, e.g. on whether performance overall is improving or not.

Volumes of activity under each SLA are also not reported.

o There are number of areas of activity that are not included in the APR,

which might reasonably be expected to be included: innovation;

engagement with stakeholders; worst-served customers; progress on

the National Smart Metering Programme (NSMP).

The choice of formatting and language, and the extent to which information

and data are provided to help understand the broader context for

performance, can be improved for the purpose of helping a reader understand

and access information easily. This applies to the reports prepared by the

DSO, TSO and by the TAO.


3. Do you have any comments on Proposals 11 and CRU’s supporting reasoning,

including but not limited to the following aspect:

a. The objective of a more comprehensive, user-friendly DSO performance


35

report, and which particular aspects of DSO behavior or performance

are under or poorly-reported on currently in the APR.


36

6. Distribution – incentives

In this section we set out and invite views on proposals for incentive mechanisms

applying to ESBN as DSO/DAO, for the period 2018 to 2020. In developing these

proposals, the CRU is also seeking to put in place arrangements that can endure,

subject to review, refinement and updating as part of the PR5 process.

The CRU’s overarching objective in proposing these mechanisms is to ensure that the

performance targets against which the DSO is incentivised are based on the most

appropriate and up-to-date data. Further, that incentives are targeted on the DSO

behaviours that matter most to network users and ultimately consumers. The

proposals have also been calibrated such that, in aggregate, the financial exposure for

the DSO/DAO is consistent with the PR4 Decision.

6.1 Unplanned outages

Objective

CRU’s objective in putting in place an incentive mechanism for unplanned outages is

to give the DSO/DAO an appropriate financial stake in maintaining appropriately high

standards of supply reliability. It reflects the high value of supply reliability to

consumers, and that behaviours of the DSO/DAO can be a significant influencing

factor on reliability outcomes.

Proposal 12

CRU propose to retain the core mechanism that has been in place during PR3,

updated for new information on the levels of performance achievable by the DSO. We

seek views on whether, and how, exclusions for unplanned outages associated with

extreme weather should be given effect. The key features of CRU’s proposal are:

Target levels for Customer Interruptions (CI) and Customer Minutes Lost

(CML), will be based on the target performance for 2015. See Annex 4 for

further details.

Deviations around these performance targets at the same levels as used in

the PR3 scheme, with the same broad structure of caps and collars.


37

The adoption of an alternative method of excluding the effects of storm events

for the purposes of measuring supply continuity.

To exclude planned outages from the incentive mechanism, and reposition

this element of the DSO’s performance as being subject to a reporting-based

“reputational” incentive.

Reasoning


Unplanned interruptions in supply can impose significant costs and

inconvenience on customers, and it is appropriate for (a) high standards to be

set for the DSO, and (b) the DSO to have a proportionate financial stake in

outcomes, both positive and negative. Further, the structure of incentive in

place during PR3 has delivered improvements over time, and is in line with

international good practice in its design and use of metrics.

The use of the most recent performance data to recalibrate the scheme

ensures that targets continue to be reasonable, but challenging – based on

actual data on what level of performance can, on average, deliver.

The proposed changes to the rules around how supply interruptions during

storm events are treated seeks to address two points.

o First, by more accurately identifying and excluding supply interruptions

associated with storms we can more accurately incentivise the DSO’s

performance in “normal” conditions. This is not to say that measures to

increase the resilience of supply during storms is unimportant. But by

not excluding storm events, out-turn performance in any given year

would be unduly influenced by whether or not there were storms – a

situation that the DSO has no control over. This effect could easily

“swamp” other effects, potentially diluting or removing the incentive

properties of the scheme.

o Second, by adopting a methodology which aligns to practice in other

jurisdictions, it makes the DSO’s performance easier to benchmark


38

against other DSOs over time. This will improve the information

available to CRU is setting targets in the future.

The proposal to focus the financial incentives solely on unplanned

interruptions, and to reposition the DSO’s performance on planned outages as

a “reputational” incentive is driven by the following: First, the costs and

inconvenience imposed by planned outages (where customers are notified in

advance) are lower than for unplanned outages, hence there is a case for

giving unplanned outages a lower weighting in any given incentive scheme12.

Second, the reputational stake for the DSO in managing planned outages

efficiently and meeting its targets is high – hence the addition of a financial

element might well have a limited additional impact on actual outcomes.

Third, there are other areas of DSO performance where the use of financial

incentives might be expected to a more direct impact on outcomes, e.g.

Worst-Served Customers.

6.2 Worst-served customers

Objective

CRU’s objective in putting in place an incentive mechanism for worst-served

customers is to improve outcomes for those households and business who would

otherwise have a sustained and materially lower standard of supply reliability. It

reflects a desire to introduce a greater degree of social fairness into the outcomes that

would otherwise prevail if investments to improve supply reliability were chosen on the

basis of narrow economic cost-benefit alone.

Proposal 13

The Worst-Served Customer (WSC) incentive under PR4 will introduce a mechanistic

assessment of ESBN’s progress to address worst-served customers. The incentive

mechanism was proposed by ESBN.

As part of the PR4 settlement, ESBN was awarded capex to fund a continuity

12 The comparable scheme in place in Australia’s National Electricity Market, for example, places a weighting of zero on planned outages, i.e. only unplanned outages are subject to financial incentives.


39

improvement programme during PR4. €1.4m of this funding is associated with

improving supplies to the DSO’s worst served customers. The allowance under PR4

is designed to improve supply for 2,000 customers. ESBN has indicated that an

increase in funding to €6.7m for its WSC programme would be sufficient to expand its

programme to benefit 6,000 customers. We propose that this funding is increased.

Alongside the programme funding, CRU proposes to introduce an incentive to ensure

ESBN faces strong financial incentives to deliver against the programme. The WSC

incentive will be symmetrical with a dead-band set at 70-80% (which equates to 70-

80% of the target volume of 6000 customers receiving a 20% improvement in

reliability). The total downside penalty for ESBN will be aligned with the total value of

the funding available for the WSC programme. Where success falls below 70%, the

value of the incentive will reduce on a straight-line basis such that zero success

means the incentive penalty is equal to the initial funding awarded (i.e. ESBN receive

no funding).

The symmetrical nature of the incentive means that should ESBN successfully deliver

reliability improvements to more than the target volume of customers, i.e. greater than

80% success rate, they will receive an incentive reward. The incentive rate per

customer will be symmetrical for under and over performance. This provides a strong

incentive for ESBN to exceed the customer volume target, and overachieve against

the incentive. The upside will be capped at €6.7m, the total value of the fund.13

Reasoning

Under PR3, CRU made a fund of €10m available to ESBN to improve the service to

worst served customers. The fund was not included in the DSO revenue and

therefore spend was subject to approval by CRU. Only a fraction of the fund was

applied for during PR3.

The risk/reward mechanisms introduced for the remainder of PR4, provides a stronger

incentive for ESBN to work to improve services for worst-served customers. The

13 This means that if ESBN exceeds the 6000 customer target, improving reliability by greater than 20% for 9000 customers, ESBN will receive the full incentive upside of €6.7m.


40

incentive is set such that the full value of the fund is available to ESBN where the

customer target is met. Equally, the symmetrical nature means that ESBN can lose all

funding where action does not result in an appropriate increase in service levels for

worst-served customers.

A key element of the incentive is that it is calibrated such that value of capital

programme funding should reduce to zero where no action is taken by ESBN (i.e. the

total penalty should equal the cost of the programme). In addition to this core

principle, we have considered the following incentive options:

- Symmetrical or asymmetrical incentive: Should the incentive provide both

penalty and reward for ESBN? An upside incentive reward could be introduced

through a financial reward where ESBN delivers an improved service to more

than the targeted volume of customers (where “success” is defined as a 20%

improvement in a targeted customers’ network reliability being seen over the

three years subsequent to intervention).

- Dead-bands around a target performance: Should there be a level of

success which results in no reward or payment through the WSC incentive, i.e.

where ESBN receives full funding but no additional incentive payment or

reward? This acknowledges that success for some customers may be harder

to achieve than others.

6.3 Customer service

Objective

CRU’s objective in putting in place an incentive mechanism for customer service is to

give the DSO/DAO an appropriate financial stake in maintaining appropriately high

standards of service. It reflects that customers and market participants rely on the

quality of services provided by the DSO/DAO, and they do not have the option of

choosing an alternative service provider in response to poor service quality.

Proposal 14

For PR4, the CRU will maintain the PR3 incentives, specifically the overall customer


41

satisfaction survey14 and Customer Satisfaction metrics (Networks Customer Contact

Centre metrics). Combined, these incentives provide a comprehensive assessment of

ESBN customer’s perceptions of services regarding planned and unplanned outages,

connection and voltage complaints (through the overall customer satisfaction survey)

and direct engagement with customers through the customer call centre. These

incentives remain fit for purpose for PR4.

The DSO incentives were not in force for the first two years of PR4 (2016 and 2017).

The incentive value caps have therefore been re-distributed to the remaining years of

PR4 so that the overall value at risk/reward for the DSO is maintained. The overall

incentive package for the DSO is explained in Section 7.3.

For Customer Satisfaction, the CRU proposes to maintain the incentive cap at +0.25%

and -1.00% of annual Allowed Revenue. This provides a strong incentive to meet the

PR4 targets. The Customer Satisfaction performance targets for the remainder of

PR4 are set out in Table 3. The target performance levels have been recalibrated,

based on PR3 outturn performance (taking the average performance during PR3 as

the target for PR4). This reflects ESBN’s actual outperformance against the Customer

Satisfaction incentive for PR3.15

Table 3 Customer Satisfaction – Incentive components and performance targets

Weight 2016 2017 2018 2019 2020

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

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

Customer Call-Back survey results 20% - - 83% 83% 83%

Mystery Caller survey results 15% - - 88% 88% 88%

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

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

Reward/Penalty per % point from Target)

- - - €0.72m €0.72m €0.72m

For the overall customer satisfaction survey, the total revenue at risk/reward for PR4

14 More Commonly known as the RedC survey 15 Based on ESBN’s submission to CRU. 16 As defined in CER/06/107



42

will be aligned to PR3 (equal to +/-€1.6m, €2009). During PR3, ESBN exceeded the

74% overall customer satisfaction survey target significantly in all years (PR3 annual

results ranged from 80.1%-83.8%). The overall customer satisfaction survey target for

17PR4 has been increased to reflect the strong performance against this incentive in

PR3 (the PR4 target is based on the average performance during PR3).18 This higher

target will ensure continued performance improvements in the DSOs approach to

customer engagement. Setting the target at 81% still provides a strong incentive for

ESBN to outperform the target and receive the full revenue reward available during the

remaining years of PR4.

Table 4 Overall customer satisfaction survey – PR4 incentive Performance targets

2016 2017 2018 2019 2020

PR4 target - - 81% 81% 81%

Reward/Penalty per % point from Target)19

- - €0.72m €0.72m €0.72m

Reasoning

The customer service incentives are core elements of the DSO incentive package.

The DSO has a central responsibility to its customers and should therefore take every

effort to continue to improve customer services. Performance targets under PR3 were

easily achieved under both of the customer services incentives. This results in

payments to ESBN. To ensure a continued improvement in performance, the

incentive targets for PR4 are more stretching, based on average performance

observed during PR3. The total value of the incentives are unchanged, providing

ESBN with a strong incentive to continue to deliver customer service through the

remainder of PR4.

6.4 Metering – traditional

17 the payment to be made to or by the DSO (in €) per 1 percentage point deviation between actual

and target performance 18 Based on ESBN’s submission to CRU. 19 the payment to be made to or by the DSO (in €) per 1 percentage point deviation between actual

and target performance


43

Objective

CRU’s objective in putting in place an incentive mechanism for metering is to give the

DSO/DAO an appropriate financial stake in providing customers and market

participants with a regular supply of accurate metering data on which to bill. It reflects

that inaccurate billing imposes costs and inconvenience on suppliers and customers,

and that the DSO/DAO is the monopoly provider of metering data.

Proposal 15

For PR4 the existing traditional metering incentive will remain for the DSO. There are

Service Level Agreements (SLA) in place for PR3 which were subject to financial

incentives. These included:

98% of meters should have 1 reading (DSO or customer) per year

99% of meters will not have back to back block estimates.

The PR3 incentive rate for both incentives will be maintained for PR4. This will be set

at €0.1m per 0.1% deviation from the target (with a 0.2% dead-band, whereby no

incentive payments are made, for the first metering incentive only). The total value

(cap and collar) of the metering incentive will also be retained at +/-€1m (2009).

The PR4 incentive targets for the DSO will be aligned with those in place for PR3.

The targets under PR3 were stretching for ESBN and we consider these appropriate

for PR4.

The DSO incentives were not in force for the first two years of PR4 (2016 and 2017).

The incentive value caps have therefore been re-distributed to the remaining years of

PR4 so that the overall value at risk/reward for the DSO is maintained. The overall

incentive package for the DSO is explained in Section 7.3.

Reasoning

The traditional metering incentives are core elements of the DSO incentive package.

They drive network company behavior that is desirable for consumers, and for the

CRU. The implementation of the National Smart Metering Policy will change metering

policy in the medium-term, and will be incentivise separately, as explained in Section

6.5. In the short-term, and for the remainder of PR4, the traditional metering incentive


44

remain applicable for ESBN.

6.5 Metering – smart

Objective

CRU’s objective in putting in place an incentive mechanism for smart metering is to

give the DSO/DAO an appropriate financial stake in delivering its part of the revised

plan for the National Smart Metering Programme (NSMP). It reflects that customers

and market participants are reliant on DSO/DAO’s delivery before the benefits of smart

metering can be realised in full.

Proposal 16

CRU proposes a new incentive mechanism linked to the DSO’s delivery of smart

metering services to market participants, and by extension consumers. The proposed

mechanism is similar in design to the proposed incentive for unplanned outages, in

that it will reward or penalise ESBN based on whether or not it meets target outcomes.

The outcomes are calibrated to the revised delivery plan that the DSO has notified to

the CRU.

The key features are:

A target profile of “smart meter delivery days” for 2019 and 2020.

A “delivery day” being equal to the provision of the requisite level of smart

metering services to one meter for one day.

The “requisite level of smart metering services” being characterised in two

distinct ways in the period to the end 2020. First, in the preparatory phase of

smart meters being installed but not operational, the presence of an installed

“smart ready” meter will equate to “delivery”. Second, in the phase when the

functionality has been switched on to retrieve data from smart meters and

make it available to the relevant Supplier and customer, then the requirement

for “delivery” will increase commensurately.

The target profiles being set are consistent with (a) 250,000 meters being

installed over the course of 2019 and 2020, and (b) that stock of meters

operating with phase 1 functionality by Q4 2020.


45

A 50% weighting being attached to each of (a) and (b) in the financial

incentive to deliver.

The scheme parameters set such that if (a) and (b) are met (within a

reasonable range of tolerance), then the financial outcome for the DSO is

equivalent to earning its regulated cost of capital on the assumed capex for

this phase. Further, for the impact of non-delivery against these metrics being

capped at a level consistent with the DSO earning its regulated cost of debt

on the assumed capex for this phase.

The option for the DSO to apply for a “grace period” of no more than six

months, if for reasons outside the control of the DSO the delivery of (a) and/or

(b) have been delayed. If the application is accepted by the CRU, then

delivery within the “grace period” would be deemed to be delivery on time.

An option for the DSO to earn an enhanced rate of return if the stock of

meters installed and operating with phase 1 functionality by Q4 2020 is

greater than 250,000.

Reasoning

A key reasoning for the proposal can be summarised as follows:

The DSO’s preparations for the delivery of its component of the NSMP have

been ongoing for a number of years, and have been funded by customers.

Further, the revised plan for delivery has been developed in large part by the

DSO, in consultation with CRU and other stakeholders. Hence, it is

reasonable to assume that the delivery plan should be capable of being

adhered to.

There are substantial benefits at stake for consumers and for market

participants through delivery of the NSMP, and significant costs for market

participants in managing their own readiness. The relatively high value

associated with the proposed incentive is, in the view of CRU, proportionate.

The proposed mechanism is focused on the measurable delivery of outputs

that impact directly on customers and market participants. CRU consider that

an output-based mechanism is more appropriate than, for example, a regime


46

based on the DSO’s progress against interim milestones – in seeking to

promote clear accountability, and to drive efficiency in delivery by the DSO.

The option for the DSO to apply for a “grace period” reflects that not all factors

influencing delivery are within the control of the DSO, e.g. there will be a role

for Suppliers to enable the rollout of smart-ready meters and in being ready to

operate phase 1 functionality themselves. Hence a degree of flexibility might

be appropriate, if there are mitigating factors.

6.6 Stakeholder engagement

Objective

CRU’s objective in putting in place an incentive mechanism for stakeholder

engagement by the DSO/DAO is to enable the potential benefits of effective

stakeholder engagement to be realised in practice. It reflects that innovation in how

stakeholders are communicated with, and how their input is used to improve how

network services meet the needs of stakeholders has significant potential value, but is

inherently difficult to quantify. Hence, without an incentive mechanism there is a risk

of “under-investment” in stakeholder engagement.

Proposal 17

The stakeholder engagement incentive will be common across the DSO, TSO and

TAO. This will give CRU the option to compare methods, engagement, and outcomes

between network companies. The CRU will place an obligation on the network

companies to put in place a stakeholder engagement strategy, to be reported on

annually. The annual report should include submission of evidence to demonstrate

effective and successful engagement.

The annual stakeholder engagement submission will be assessed by CRU. To ensure

a balanced assessment of consumer needs and engagement, the CRU propose to

appoint a stakeholder engagement panel to assist with the evaluation. The panel

would advise the CRU on the merits of the stakeholder engagement strategy, the

delivery of the strategy over the preceding year, and the implementation of methods to

improve stakeholder engagement in future.

The stakeholder engagement incentive will be reputational in year 1, with no financial


47

reward or penalty associated with performance. The results of the CRU assessment,

which will include insights from the stakeholder engagement panel, will be published.

Following the first assessment year, the CRU will consider whether a financial

incentive should be introduced for the stakeholder engagement incentive. Any

financial value attached to this incentive will be re-distributed from the other DSO

incentives, therefore maintaining the total incentive value at risk/reward under PR4.

Reasoning

Stakeholder engagement is currently a core activity for the DSO. Stakeholder

engagement across the industry is however disjointed. The distinction in roles

between network companies can be unclear, and this can be exacerbated by

inconsistent communication and engagement strategies.

The intention of the new stakeholder incentive is to provide a clear framework for the

CRU to assess the measure taken by ESBN, and the other network companies, to

understand and address the needs of customers. A consistent assessment approach

across network companies will give both the CRU and the network companies the

opportunity to learn from industry good practice and continually improve engagement

methods. It also provides a platform for the network companies to demonstrate their

efforts and success in these areas.

Stakeholder engagement benchmarking is an approach that Ofgem has developed as

part of the RIIO package of price control incentives (specifically the Stakeholder

Engagement (and Consumer Vulnerably) Incentive). Ofgem employ a panel to advise

on DNO performance, based on a set of pre-defined objectives. The limited number of

network companies in Ireland reduces the competitive pressure compared to GB. The

consistent application of the CRU’s stakeholder engagement incentive across all

network companies will go some way to address this.

6.7 Strategic and innovative thinking

Objective

CRU’s objective in putting in place an incentive mechanism for strategic and


48

innovative thinking by the DSO/DAO is to encourage and reward the DSO/DAO for

actively, and imaginatively, tackling the sizeable challenges associated with the

transition to a low carbon energy system – including the accommodation of distributed

and micro-generation, storage and more active management of demand. It reflects

that the DSO/DAO has an important role in articulating the variety of commercial and

technical challenges, and working with market participants, the TSO, the TAO and

other stakeholders to develop and test practical, workable solutions.

As indicated by the CRU in the PR4 decision, the innovation will be funded through

PR4 via the Strategic Innovation Fund (SIF) – providing funding for research,

development, demonstration and adoption of innovative technology, as well as

operating and commercial arrangements.

The value of the SIF for PR4 is set at €100m. The size of the fund reflects the scale of

challenge in the short-term (i.e. to 2020), and the significance of the consumer benefit

from the successful delivery of innovation.

Proposal 18

Funding under the SIF will take place under a clear submission and assessment

framework. An annual assessment will be completed by CRU to determine the quality

of the process to identify innovation20, the efficiency in the delivery of innovative

projects and the way that projects learnings or outcomes have been used by ESBN.

This three stage assessment will be as follows:

1. The quality of the ESBN processes that generate, prioritise and specify

projects: For example, are the projects identified consistent with the aims of

the strategy? Is the innovation clearly separable to Business-as-usual? Is the

mix of projects balanced and complete relative to the stated aims of the

strategy? How is internal and external data and evidence used to generate

potential projects?

2. The efficiency of delivery: Have the projects in the pipeline been delivered

20 Innovation areas may also be identified by CRU and proposed to ESBN for assessment. Under this approach, ESBN would need to consider the merits of innovation in these areas, and include their assessment as part of the annual reporting process.


49

efficiently, or are on track to deliver in future (noting that some projects will take

some time to implement)? Are there appropriate management controls in

place? Is the input of partners or other external parties being managed well?

Are the projects being well communicated?

3. Use of learning/outcomes: How effectively/efficiently has ESBN captured and

made use of the learnings from innovation? What are the internal processes to

make this happen? What are the examples, and what have the impacts been

(across all types of findings, including when projects did not deliver the desired

outcomes)?

This evidence should be submitted to the CRU on an annual basis. It will be used by

the CRU to inform a balanced scorecard assessment, resulting in a score of

strong/adequate/weak for the year.

To support the innovation submission, the CRU expect to see economic and

assurance methods applied by ESBN to demonstrate standard of performance. For

example the use of Cost-Benefit Analysis (CBA), where appropriate, to demonstrate

welfare benefits; collaboration with third parties to demonstrate validation of

innovation; and the option to include third party assurance of the process to

demonstrate efficiency in delivery. The score over the remainder of PR4 will then

determine ESBN’s revenue reward through the SIF.

Evidence on learnings/outcomes will be contingent on where individual projects have

got to in their lifecycle. The purpose of this framework is to assess, with evidence, the

quality of what could reasonably have been expected to be present during any

particular 12-month period.

In evaluating the SIF allowances for the PR4 period the CRU will take into account the

consumer value delivered and retained. The evaluation of ESBN’s innovation

activities, and the link between this evaluation and the SIF, is designed to be broad-

based. In CRU’s view, this means that all innovation projects being delivered and

learned from during PR4 should be within scope. This includes projects where the

original funding pre-dates PR4, such as the PR3-funded Electric Vehicle R&D Pilot.

For PR4, SIF allowances for 2018, 2019 and 2020 will be assessed, with a total value

of €60m. The value under assessment will be structured as follows:


50

A “strong” score across the assessment areas, for all years in PR4 would

result in the full allowance (€20m per year for 3 years)

An “adequate” score would result in a €5m being held back each year

A “weak” performance would result in €15m being held back each year.

Reasoning

There is already some innovation underway as part of PR4, and earlier price review

periods. Innovation is currently funded through the main Price Review revenue

allowances. The SIF was introduced to respond to the step-change in innovation

spend that is required to keep pace with industry and technology change. The nature

of innovation spending, and in particular the risk and uncertainty inherent in investing

in untested projects or trials, calls for a process that recognises these risks and

possible rewards. Without a dedicated and clear investment route, there is a risk that

socially beneficial innovation investment is not progressed to the detriment of

consumers.

The Electric Vehicle R&D Pilot received funding of €25m under PR3 and the pilot

concluded in PR4. As outlined in CRU/17/283 ESBN is due to submit a final report on

the Pilot and a plan for the assets (in terms of preparation for sale and maintenance in

the interim). As this was a significant innovation investment by the DUoS customer this

will provide the CRU with valuable insight into the ESBN’s approach to such project’s

and the likelihood of strong performance in current and future innovation projects,

hence it will be a valuable input into the evaluation. It is also noted that as the SIF is

intended to deliver on-going and long-term benefits to consumers a key aspect of the

assessment will be how well ESBN maintains and extracts value from learnings and

physical assets acquired during an innovation project – such as the Electric Vehicle

R&D Pilot.

The SIF design provides a clear framework for innovation investment for ESBN. The

assessment and reward will be aligned with outcomes that are valuable for consumers

– i.e. socially beneficial projects that are demonstrably not business-as-usual activities

for the DSO (and therefore funded elsewhere in the Price Review). It will reward

ESBN for innovative projects that are supported and validated by third parties, further


51

reinforcing the wider value of innovation. The size of the fund, and costs to ESBN of

sub-standard performance, will provide a strong financial incentive to drive these

behaviours.

The SIF design builds on successful innovation stimuli in GB and across Europe. The

principles of collaboration, third party validation and auditing performance are

embedded in Ofgem’s network innovation framework and stakeholder engagement

incentives.

Through setting the SIF objectives, both the CRU and ESBN will have the opportunity

to identify innovation areas that are deemed valuable to consumers. Where these

areas are identified by CRU, ESBN will need to consider the evidence and benefits

assessment. Based on a current assessment of areas of potential benefit of

innovation, the CRU considers the following candidates 21for inclusion in the SIF:

Facilitating the participation of distribution connected generation in System

Services.

Facilitating the participation of Demand Side Units in System Services.

Increasing the number of sites that can participate in Demand Side Units

unrestricted.

Maximising the value to be recovered from the Electric Vehicle R&D Pilot.





to the key areas of DSO behaviour for market participants and

consumers

b. The proposed change to move performance against planned outages to

a reporting-based reputational incentive, and not focused on financial

21 this is a non-exhaustive list.


52

incentives instead focused on improving outcomes for worst-served

customers

c. The case for the proposed new incentive on stakeholder engagement,

and types of engagement (and associated outcomes) it should seek to

encourage

d. The form and strength of incentive for the proposed new incentive

mechanism on smart metering delivery by the DSO.


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7. Incentives as a package

In this section we set out and invite views on how the component parts of our

incentives proposals combine financially as a package, for each of the TSO, TAO and

DSO.

For each network company, we present the total revenue at risk, i.e. the maximum

cost to the network company of poor performance, and the total revenue reward, i.e.

the maximum additional revenue that can be earned for out-performance.

7.1 TSO incentive package

The incentive package for the TSO includes elements of the PR3 incentive package

that are still relevant and will continue into PR4, and new incentives around

Investment Planning and Delivery, and Stakeholder engagement.

For PR4, the total value of the incentive revenue at risk/reward will be the same as for

PR3. For the TSO, this total incentive value is capped at +/-4% of annual internal

opex, around €2m per year with a total PR4 pot of under €10m (real 2014). This

operational incentive cap excludes the strategic incentive for the TSO, a €5m incentive

introduced for PR4 and explained in Section 4.6.

The total incentive revenue at risk/reward for the TSO over PR4 is shown in Table 5.22

For the TSO, the incentive cap is symmetrically applied over PR4. The values

presented in both tables are based on the published PR4 ex-ante opex allowances for

the TSO. These are indicative only. The actual incentive payments will be calculated

by CRU annually during PR4, and calculated in nominal terms.

22 The opex profile for the TSO shown in these tables is taken from the following CRU decision (Section 12.1): https://www.cru.ie/wp-content/uploads/2015/07/CER15296-Decision-on-TSO-and-TAO-Transmission-Revenue-for-2016-to-2020-1.pdf




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Table 5 TSO incentive revenue at risk/reward for PR4

Incentives for the TSO (€m, 2014) 2016 2017 2018 2019 2020 Total

PR4 internal opex 46.70 47.80 47.20 45.50 45.80 233.00

System Minutes Lost 0.37 0.38 0.38 0.36 0.37 1.86

System Frequency 0.37 0.38 0.38 0.36 0.37 1.86

TSO Project Milestones 0.65 0.67 - - - 1.32

Delivery of Enhanced Network Capacity 0.47 0.48 - - - 0.95

Investment Planning and Delivery (NEW)23

- - 1.13 1.09 1.10 3.32

Stakeholder engagement (NEW)24 - - - - - TBD

Total 1.87 1.91 1.89 1.82 1.83 9.32

Percentage of internal opex 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%

Explanation of the TSO incentives for PR4

This section of the consultation explains the rationale for the value of each incentive

for the TSO during PR4.

Transmission System Performance – System Minutes Lost and System

Frequency

The value and methodology for the PR4 System Performance incentives will

remain unchanged from PR3.

The incentive risk and reward will remain capped as +/-0.80% of the TSO’s

annual internal opex for System Minutes Lost and for System Frequency (with

a total of 1.60% for the System Performance incentives).

For the TSO, the operational incentives were not turned off for the TSO in

2016 and 2017 (unlike for the DSO where incentive revenue for 2016 and

2017 is re-distributed to the remainder of the PR4 period).

Transmission System Development

23 For further information on this incentive, please see Proposal 5 in section 4.2 24 For further information on this incentive, please see Proposal 8 in section 4.5


55

Under PR3, the TSO was subject to a ‘Project Milestone’ incentive and an

incentive on the ‘Delivery of Enhanced Network Capacity’. Together, these

incentives were capped at 1.40% and 1.00% of internal opex respectively.

For 2016 and 2017, these incentives will remain in place for the TSO.

Starting in 2018, these incentives will be replaced by the single ‘Investment

Planning and Delivery’ (IPD) incentive.

The total incentive cap on the Transmission System Development incentive is

unchanged between PR3 and PR4 at 2.40% of annual internal opex.

Over the whole of the PR4 period, the value of the TSO incentive risk/reward

cap for Transmission System Development will be unchanged (at 2.40% of

internal opex).

Stakeholder engagement incentive – new incentive for PR4

The stakeholder engagement incentive will be a new incentive common

across the TSO, TAO and DSO/DAO.

For 2018, the stakeholder engagement incentive will be reputational for all

parties.

From 2019, the incentive value will be set by the CRU based on a review of

the success of performance in 2018.

The revenue at risk/reward for the stakeholder engagement incentive for the

TSO will be re-distributed from the value available under the Transmission

System Performance, SML and SF, incentive.

The total incentive package value under PR4 for the TSO will be unchanged

to the proposal in this consultation.

7.2 TAO incentive package

The incentive package for the TAO includes elements of the PR3 incentive package

that are still relevant and will continue into PR4, and new incentives around

Investment Delivery, and Stakeholder engagement.


PR3. For the TAO, the incentive package is capped at +/-5% of annual opex, around

€3m per year with a total PR4 pot of under €15m.


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The total incentive revenue at risk/reward for the TAO over PR4 is shown in Table 6.25

For the TAO, the incentive cap is symmetrically applied over PR4. The values

presented are based on the published PR4 ex-ante opex allowances for the TAO.

These are indicative only. The actual incentive payments will be calculated by CRU

annually during PR4, and calculated in nominal terms.

Table 6 TAO incentive revenue at risk/reward for PR426

Incentives for the TAO (€m, 2014) 2016 2017 2018 2019 2020 Total

PR4 opex 54.10 58.50 60.50 62.70 64.80 300.60

Issue PIP 0.22 0.23 - - - 0.45

Scheduled outages 0.46 0.50 0.51 0.53 0.55 2.56

Construction and Energisation 2.03 2.19 - - - 4.22

Investment Delivery (ID) (NEW)27 - - 2.51 2.60 2.69 7.80

Stakeholder engagement (NEW)28 - - - - - TBD

Total 2.71 2.93 3.03 3.14 3.24 15.03

Percentage of TAO allowed opex 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Explanation of the TAO incentives for PR4

There were three Transmission System Development incentives for the TAO in

operation during PR3. These three incentives will continue to operate in PR4 for 2016

and 2017. The incentive around outage scheduling will remain in place for the whole

of PR4. The alterations to the remaining incentives are explained below.

Incentive around Issuing the PIP

For PR3, the PIP incentive was capped at +/-0.4% of TAO annual opex. This

incentive will remain in place, with the same capped value for the TAO for

2016 and 2017.

25 The opex profile for the TAO shown in these tables is taken from the following CRU decision (Section 12.2): https://www.cru.ie/wp-content/uploads/2015/07/CER15296-Decision-on-TSO-and-TAO-Transmission-Revenue-for-2016-to-2020-1.pdf 26 This table is presented assuming that the CRU consultation concludes that the PIP and Construction and Energisation incentives for the TAO are re-formatted to form the new Investment Delivery incentive (option 2 as described in Section 4.3). 27 For further information on this incentive, please see Proposal 6 in section 4.3 28 For further information on this incentive, please see Proposal 8 in section 4.5




57

From 2018 onwards, CRU has set out 2 possible incentive options: the first

option would remove the PIP incentive, replacing it with the Investment

Delivery incentive explained below; the second option would retain the PIP

incentive in its current form and value. Both options are explained in Section

4.3.

Construction and Energisation incentive

The TAO incentive around Construction and Energisation was capped at +/-

3.75% of annual opex for PR3. This incentive will remain in place, with the

same capped value, for the TAO for 2016 and 2017.

From 2018 onwards, CRU has set out 2 possible incentive options: the first

option would remove the Construction and Energisation incentive, replacing it

with the Investment Delivery incentive explained below; the second option

would retain the Construction and Energisation incentive in its current form

and value. Both options are explained in Section 4.3.

The Investment Delivery incentive – new incentive for PR4

This new incentive will come into force in 2018 and run to the end or PR4 in

2020.

The total value of the incentive will be 4.15% of the TAO opex for years 2018,

2019 and 2020.

For 2018, 2019 and 2020, the revenue at risk/reward has been redistributed

from the PIP incentive and the Construction and Energisation incentive as

explained above.

The reward for the TAO under the Investment Delivery incentive will be

symmetrical, so that the incentive is capped at +/-4.15% depending on the

outcome of the incentive assessment (as explained in Section 4.3.

In addition to these Transmission System Development incentives, the TAO will also

be subject to a new Stakeholder Engagement incentive (aligned with the incentive

introduced for the TSO and DSO).

Stakeholder Engagement incentive – new incentive for PR4


58

For 2018, the Stakeholder Engagement incentive will be reputational for all

parties.

From 2019, the Stakeholder Engagement incentive value will be set by the

CRU based on a review of the success of performance in 2018.

The revenue at risk/reward for the stakeholder engagement incentive for the

TAO will be re-distributed from the value available under the Investment

Delivery incentive.

The introduction of the Stakeholder Engagement incentive will maintain the

total TAO incentive value under PR4, as set out in this consultation.

7.3 DSO/DAO incentive package

The incentive package for the DSO includes elements of the PR3 incentive package

that are still relevant and will continue into PR4, and new incentives introduced from

2018 for the remainder of PR4. In addition to these operational incentives, the DSO

also has access to the Strategic Innovation Fund in PR4.


PR3 – this is calculated as 4% of DSO Allowed Revenues (on an annual basis and

across the whole PR4 period). To maintain this cap for the PR4 operational incentives

(excluding the SIF), the distribution of revenue available/at risk across each incentive

has been adjusted for PR4 as set out in this consultation.

For the DSO, the operational incentives for the first 2 years of PR3 have been turned

off. To maintain the strength of the incentives (i.e. the total size of the incentive

risk/reward value over the whole of PR4), the annual value of the remaining incentives

for 2018, 2019 and 2020 has been increased.

The total value of revenue at risk for the DSO is shown in

Table 7. The total possible incentive reward for the DSO is shown in


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Table 8.

The figures presented in both table are based on the published PR4 Allowed

Revenues. These are indicative only. The actual incentive payments will be

calculated by CRU annually during PR4, and calculated in nominal terms.

Table 7 DSO incentive revenue at risk for PR4

Incentives for the DSO (€m, 2014) 2016 2017 2018 2019 2020 Total

PR4 Allowed Revenue 737.07 817.12 835.83 857.72 883.23 4130.97

Continuity – Customer Interruptions - - 15.27 15.52 15.81 46.60

Continuity – Customer Minutes Lost - - 15.27 15.52 15.81 46.60

Overall Customer Satisfaction Survey29 - - 2.72 2.72 2.72 8.16

Customer Satisfaction - - 13.54 13.76 14.01 41.31

Metering – 1 read/year - - 0.85 0.85 0.85 2.55

Metering – Estimated reads - - 0.85 0.85 0.85 2.55

Smart Metering (NEW) - - 4.00 4.00 16.00 24.00

Stakeholder engagement (NEW) - - - - - 0.00

Worst served customer (NEW) - - 2.23 2.23 2.23 6.70

Total 0.00 0.00 54.74 55.45 68.28 178.46

Percentage of DSO allowed revenues 0.00% 0.00% 6.55% 6.46% 7.73% 4.32%

For the DSO, the revenue reward is lower than the revenue at risk for PR4. This is

because the value of the customer satisfaction incentive cap is asymmetrical

(+0.25%/-1.00%) – this is unchanged from PR330. This means that the DSO can earn

a maximum of €10.33m on this incentive (customer satisfaction), however the amount

the DSO can lose is €41.31m. This explains the difference between the total revenue

at risk €178.46m (Table 7) and total revenue for reward €147.52m (Table 8)

The total incentive cap or the DSO is set at 4.00% of annual Allowed Revenues31.

29 More commonly known as the RedC survey 30 This is unchanged since CER/06/107 31 As per CER/06/107




60

These caps are calculated annually by the CRU in nominal terms and taking into

account adjustments made between years of the PR period. This explains why the

total cap, presented in Table 7 does not equal 4.00%.

Table 8 DSO incentive revenue reward for PR4

Incentives for the DSO (€m, 2014) 2016 2017 2018 2019 2020 Total

PR4 Allowed Revenue 737.07 817.12 835.83 857.72 883.23 4130.97

Continuity – Customer Interruptions - - 19.21 19.52 19.88 58.62

Continuity – Customer Minutes Lost - - 19.21 19.52 19.88 58.62

Overall customer satisfaction survey - - 2.72 2.72 2.72 8.16

Customer Satisfaction - - 3.38 3.44 3.50 10.33

Metering – 1 read/year - - 0.85 0.85 0.85 2.55

Metering – Estimated reads - - 0.85 0.85 0.85 2.55

Smart Metering (NEW) - - - - - 0.00

Stakeholder engagement (NEW) - - - - - 0.00

Worst served customer (NEW) - - 2.23 2.23 2.23 6.70

Total 0.00 0.00 48.46 49.14 49.93 147.52

Percentage of DSO allowed revenues 0.00% 0.00% 5.80% 5.73% 5.65% 3.57%

Explanation of the DSO incentives for PR4

This section explains the rationale for each incentive value decision for PR4.

Continuity of Supply – Customer Interruptions (CI) and Customer Minutes Lost

(CML)

The CI and CML incentives will be retained for PR4. The cap on revenue at

risk for each incentives has been reduced from 1.50% of annual Allowed


61

Revenues under PR3, to 1.13% under PR4.32 This reflects the reduced scope

of the CI incentive, which now will only apply to unplanned interruptions.

The revenue reward available to the DSO for good performance against the

CI and CML incentive is higher that the revenue at risk, at 1.42% of annual

Allowed Revenue. This increase is applied to ensure that the total revenue

reward during PR4 remains the same as during PR3 (4.00% of Allowed

Revenue across the whole PR period).

Overall customer satisfaction survey33

The overall customer satisfaction survey incentive was capped at +/-€1.6m

per year for PR3 (real €2009). For PR4, we will maintain this annual value.

As the incentive for 2016 and 2017 was turned off for the DSO, the 2016 and

2017 value has been re-distributed to the remaining years of PR4 to maintain

the overall strength of the incentive.

This results in an annual incentive value for 2018, 2019 and 2020 of +/-

€2.72m with a total PR4 value of +/-€8.16m (this is equivalent to €1.63m per

year for 5 years in real €2014 prices).

The risk/reward incentive cap for overall customer satisfaction survey is

symmetrical over PR4.

Customer Satisfaction (Network Customer Contact Centre metrics)

The Customer Satisfaction incentive is unchanged from PR3. The annual

upside is capped at 0.25% of Allowed Revenue and the annual downside is

capped at -1.00%.

Aligned with the other DSO incentives, the Customer Satisfaction incentive

risk/reward value from 2016 and 2017 will be re-distributed to 2018, 2019 and

2020. This will ensure the DSO has strong incentives for the remainder of

32 This is the equivalent annual percentage if the incentive was applied to all 5 years under PR4. As the PR4 incentive values for 2016 and 2017 for the DSO have been re-distributed to the remainder of PR4, the incentive value for 2018, 2019 and 2020 is higher than this. Over the whole of PR4, the revenue at risk/reward for the CML and CI incentive is 1.13%/1.42% of allowed revenue respectively. 33 Commonly known as the RedC survey incentive


62

PR4, but maintains the total Customer Satisfaction incentive value for PR4 as

a whole.

Metering incentives – ‘At least 1 read per year’ and ‘Estimated reads’

The PR3 metering incentives will be maintained for PR4. For PR3 the

incentive risk/reward value was capped at +/-€0.50m per year for each

metering incentives (with a total value of +/-€1m in real €2009 prices).

For PR4, these values have been uplifted to €2014 prices and re-distributed

so that the total incentive value is available for 2018, 2019 and 2020. This will

ensure the DSO has strong incentives for the remainder of PR4, but maintains

the total Metering incentives value for PR4 as a whole.

Smart metering incentive (NSMP “Smart delivery days”) – new incentive for PR4

The NSMP incentive is a new DSO incentive for PR4 and will come into force

from 2018.

The incentive is designed to reward the successful delivery of the smart

metering programme plan, as defined by smart delivery days as explained in

Section 6.5)

Under PR4 and the revised NSMP delivery plan, the DSO has been awarded

capex to match the deployment. Poor delivery against the plan will result in a

revenue reduction from the DSO through the Smart meter incentive.

The NSMP incentive revenue profile for the remainder of PR4 is set at €4m in

2018 and 2019 and €16m in 2020. This is equivalent to around 0.6% of the

DSO total Allowed Revenue over the whole of PR4.

As funding for the NSMP roll-out has been provided through the PR4

settlement, the NSMP incentive is downside only (effectively reducing the

funding allowance where the delivery targets are not met).

Stakeholder Engagement incentive – new incentive for PR4

The Stakeholder Engagement incentive is a new reputational incentive for

PR4.

The incentive value will be reputational in the first year, as the framework

process for assessment is developed between the DSO and CRU.


63

For 2019 and 2020 the CRU propose to introduce a financial incentive for

performance under the stakeholder engagement incentive.

The value for this new incentive will be symmetrical, with the same value at

risk for poor performance as for reward for strong performance, and will be

determined following review of performance under the first year of the

incentive.

The revenue at risk/reward for the Stakeholder Engagement incentive for the

DSO will be re-distributed from the value available under the Continuity of

Supply (CI and CML) incentive.

Worst Served Customer incentive – new incentive for PR4

The Worst Served Customer incentive is also a new incentive that will start in

2018.

This incentive will be capped at +/-€6.7m over the remainder of PR4.

The incentive reward is payable on the quantified reduction in the number of

Worst Served Customers by the DSO.

The incentive will apply where network reliability is improved by 20% per

customer for worst served customer over a three year period. The incentive

will be based on a payment of +/-€1,595 per customer around a dead band of

70-80%. This means that the DSO would be penalised per customer if less

than 70% of targeted customer receive this improvement, and would earn the

incentive if more than 80% of customers receive this improvement. The

maximum incentive reward allows ESBN outperform the incentive, which is

based on a target customer volume of 6000 customers.34


5. Do you have any comments on how CRU’s proposals combine as packages of

incentives for the TSO, TAO and DSO/DAO including reasoning or evidence for

34 If EBSN improves reliability for 9000 customers, the full €6.7m upside will be achieved.


64

alternatives or variants that might better meet CRU’s objectives?


65

Annex 1: International review

The CRU engaged consultants to review regulatory reporting and incentive

mechanisms in operation in other jurisdictions. This international review of best

practice provides evidence of successful methods and approaches employed by other

National Regulatory Authorities, in Europe and internationally. This international

review has been used to inform and develop the proposals set out in this consultation.

The assessment took each of the consultation areas in turn, to establish where

appropriate benchmarks were available, a description of the mechanisms in place, and

to identify key contacts within relevant organisations. Key jurisdictions for review

included GB, with a focus on Ofgem’s implementation of the RIIO regulatory

framework, and the east coast of Australia. Regulatory mechanisms in other

European jurisdictions were also used as evidence as relevant, mainly focusing on

other European Member States.

The desktop research was complimented with bilateral discussions with National

Regulatory Authorities in Europe and Australia, to provide first-hand evidence of the

practicality and merits of mechanisms employed.

Jurisdiction Key characteristics Reason for selection

GB Long-term, liberalised market

Mature, stable regulatory framework

Incentive-based network regulation

3 Transmission Owners, 14 Distribution

Network Owners, 1 System Operator – no state-owned companies

Similar market structure and challenges to Ireland – e.g. evolving energy mix, development of smart networks, distributed generation and smart meter roll-out

Recent fundamental review of framework for network regulation

Large range of different incentive mechanisms introduced (with a focus on innovation and stakeholder engagement)

Australia

(East coast)

More recently liberalised market than GB

New regulatory framework adopted in 2005

Incentive-based network regulation

8 Transmission Owners (including interconnector operators), 13 Distribution Network Owners, 1 system operator (not-for-profit, with national transmission planning function) – some state-owned companies

Actively managed, and well-documented reform programme

Combination of state-owned and private companies

Active approach to network planning and needs case assessment


66

Others Varied, based on characteristics of

relevant European Member States

As relevant, to provide wider context and specific examples of best practice


67

Annex 2: Draft Annual Reporting Principles

This annex sets out a draft set of principles to inform the development by the TSO,

TAO and DSO/DAO of revised, more useful friendly annual performance reports.

Purpose

The APR shall be a clear, accessible and non-technical document summarising

performance during the relevant year in each relevant area of performance.

Format

It shall be short in length, and visually appealing. It shall contain no appendices and

annexes, but may provide links to other relevant material for a reader seeking more

detailed information in a particular area. It shall make effective and proportionate use

of tables, charts and diagrams – and supporting commentary – such that a non-

technical reader can easily discern:

Levels of performance

Key behaviours of the licensee

Context of past performance.

It shall be easy to compare and reconcile to past APRs prepared under this

framework.

Scope

It shall order the material in a complete set of logical sections derived from an analysis

of the different ways in performance impacts on customers, market participants or

other stakeholders. For example:

Maintaining reliable supplies of electricity

Meeting new demands for connection

Servicing customers and the market

Optimising the network

Utilising innovation

Engaging with stakeholders

Safety

Managing environmental footprint.


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Ongoing improvement

The usefulness of the performance report shall be review annually, including

on the basis of feedback from stakeholders. Improvements, such as new

metrics for measuring performance, shall be developed and introduced

promptly.


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Annex 3: TSO incentives

This annex provides a summary of EirGrid’s performance of under the ‘System

Minutes Lost’ (SML) and ‘Frequency’ incentive. The historical performance during

PR3 has been used to establish the target rates, dead-bands and upper and lower

bounds for the SML and Frequency incentives under PR4, included in this proposal.

The dead-band for PR4 will be reduced to reflect recent performance under the SML

incentive. The dead-band will be set at 0.6-2.1 SML per year.

Table A1 PR4 Customer Minutes Lost incentive targets for the TSO

Incentive 2011 2012 2013 2014 2015 PR3

average PR4 rate

Actual performance 0.183 0.372 0.357 2.881 0.049 0.768

Dead-band 1.5-3.0 1.5-3.0 1.5-3.0 1.5-3.0 1.5-3.0 1.5-3.0 0.6-2.1

Upper Bound 3.5 3.5 3.5 3.5 3.5 3.5 2.5

Lower bound 1.0 1.0 1.0 1.0 1.0 1.0 0.0

The incentive rate for the CML incentive will be the same for PR3 and PR4:

Plus €66,000 per 0.1 minute below dead-band

Minus €66,000 per 0.1 minute above the dead-band

The PR4 dead-band is positioned to allow EirGrid to earn the full capped incentive rate

for the CML incentive each year during PR4 (equal to 0.8% of internal opex).

The Frequency target for PR4 will be set at 99%, measured as the proportion of time

per year when the Frequency is between the limits of 49.9Hz and 50.1Hz.

Table A2 PR4 Frequency incentive targets for the TSO

Incentive 2011 2012 2013 2014 2015 PR3

average PR4 rate

Actual performance 99.6% 99.3% 99.3% 99.2% 99.4% 99.4%

Target 96.0% 96.0% 96.0% 96.0% 96.0% 96.0% 99.0%

Upper Bound 98.0% 98.0% 98.0% 98.0% 98.0% 98.0% 100%

Lower bound 94.0% 94.0% 94.0% 94.0% 94.0% 94.0% 98.0%

The incentive rate for the CI incentive for PR3 were set at:

Plus €33,000 per 0.2% above the target

Minus €33,000 per 0.2% below the target


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For PR4, the rate will be adjusted to allow EirGrid to earn the same upside and

downside under PR4 as under PR3:

Plus €33,000 per 0.1% above the target

Minus €33,000 per 0.1% below the target

EirGrid’s historical performance under the SML and CI incentives are shown in the

Figures below.

Figure 1 PR2 and PR3 SML incentive performance

Figure 2 PR2 and PR3 Frequency incentive performance

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

SML p

er

year

Deadband Actual performance (SML) Upper and lower bound

Plus €66,000 per 0.1 minute below deadband

Minus €66,000 per 0.1 minute above deadband

Annual incentive capped by upper and lower bounds


71

90%

91%

92%

93%

94%

95%

96%

97%

98%

99%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Fre

quency

within

49.9

Hz

to 5

0.1

Hz

Actual performance PR3 target performance PR3 Upper and lower bounds

Minus €33,000 per 0.2% below target

Plus €33,000 per 0.2% above target

Annual incentive capped by upper and lower bounds


72

Annex 4: DSO incentives

This annex provides a summary of ESBN’s performance of under the Customer

Minutes Lost (CML) and Customer Interruptions (CI) incentive (based on ESBN’s

published Annual performance reports for PR3). The historical performance during

PR3 has been used to establish the target rates, dead-bands and upper and lower

bounds for the CML and CI incentives under PR4, included in this proposal.

The CML target for PR4 will be based on the target performance for 2015. This

results in a rate of 68.00 for PR4. During PR3, actual CML performance was worse

than the target, in 2013, 2014 and 2015. It is appropriate to use the 2015 target value

to set the CML target for PR4. The CML target under PR4 will be based on unplanned

outages only, therefore no target is set for the planned outage rate (the planned

outage performance will be assessed through a reputational incentive).

Adjusted actual performance (for CML and CI) includes ESBN’s performance taking

into account the impact of Maintenance Renewal Programmes.

Table A3 PR4 Customer Minutes Lost35 incentive targets for the DSO

2011* 2012* 2013 2014 2015 PR3

average PR4 rate

Unplanned

CML target - - 76.40 72.20 68.00 72.20 68

CML actual 69.58 59.83 86.72 97.67 82.99 79.36 -

CML actual (adjusted) 69.58 59.83 86.72 97.67 82.99 79.36 -

Planned

CML target - - 55.70 55.80 55.80 55.77 -

CML actual 46.59 45.25 42.13 49.78 73.06 51.36 -

CML actual (adjusted) 24.53 22.64 27.21 30.38 41.25 29.20 - *Planned and unplanned data was not available for 2011 and 2012

The Customer Interruptions incentive target for PR4 is 1.10 for unplanned interruptions, based on

the average of the PR3 performance (using data available to CRU at the time of writing).

35 The average number of minutes without supply per customer connected in the year (CML).


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Table A4 PR4 Customer Interruptions36 incentive targets for the DSO

2011* 2012* 2013 2014 2015 PR3

average PR4 rate

Unplanned

CI target - - 1.13 1.10 1.06 1.10 1.04

CI actual 0.95 0.83 1.14 1.24 1.03 1.04 -

CI actual (adjusted) 0.95 0.83 1.14 1.24 1.03 1.04 -

Planned

CI target - - 0.23 0.23 0.23 0.23 -

CI actual 0.18 0.19 0.17 0.18 0.25 0.19 -

CI actual (adjusted) 0.11 0.10 0.11 0.13 0.15 0.12 - *Planned and unplanned data was not available for 2011 and 2012

36 average number of interruptions per customer connected in the year (CI) and


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Annex 5: Questions for consultation

CRU is inviting stakeholders to submit views and evidence on the following questions:



a. The objective of a more comprehensive, user-friendly joint TSO/TAO

performance report, and how best to meet it; and

b. The rationale for a companion summary report each year on investment

planning and delivery.




to the key areas of TSO and TAO behavior for market participants and

consumers;

b. The proposed change in the approach to setting incentives for

investment planning and delivery, based on assessment against a

broader range of criteria and evidence than under the existing

mechanism; and

c. The choice of key strategic objectives and associated outputs for the

TSO to be rewarded for exceptional performance.

3. Do you have any comments on Proposals 11 and CRU’s supporting reasoning,

including but not limited to the following aspect:

a. The objective of a more comprehensive, user-friendly DSO performance

report, and which particular aspects of DSO behavior or performance

are under or poorly-reported on currently in the APR.




to the key areas of DSO behavior for market participants and

consumers;


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b. The proposed change to move performance against planned outages to

a reporting-based reputational incentives, and focus financial incentives

instead on improving outcomes for worst-served customers.

c. The case for the proposed new incentive on stakeholder engagement,

and types of engagement (and associated outcomes) it should seek to

encourage.

d. The form and strength of incentive for the proposed new incentive

mechanism on smart metering delivery by the DSO.

5. Do you have any comments on how CRU’s proposals combine as packages of

incentives for the TSO, TAO and DSO/DAO including reasoning or evidence for

alternatives or variants that might better meet CRU’s objectives?

Documents

Commission for Regulation of Utilities Reporting and ......An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities ii new investment of €1,024m1, and operating costs