Reporting and Incentives under Price Review 4

Transcription

1 An Coimisiún um Rialáil Fóntas Commission for Regulation of Utilities Reporting and Incentives under Price Review 4 Decision PR4 Reporting & Incentives Decision Reference: CER/18/087 Date Published: 10/05/2018 Queries to: dlindsay@cru.ie 0

2 Executive Summary In December 2015, the CRU set its 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, the CRU also committed to update the reporting and incentive arrangements. The PR4 period runs from 2016 to Monitoring and reporting gives visibility to what each company is delivering, and improves accountability. Incentive mechanisms go a step further by attaching additional financial 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 the CRU seeks to protect the interests of customers. This document sets out a set of twenty decisions for improving reporting and incentives arrangements, covering the totality of the activities undertaken by TSO, TAO and DSO/DAO on behalf of current and future customers and market participants. These decisions 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. This decision represents an important step in the CRU s development of an enhanced and more consistent approach to regulating and incentivising our critical electricity, gas and water network companies. The overall objective is to ensure that network companies are focussed on: delivering better outcomes for customers, using innovation to deliver services more efficiently, and meeting key national strategic objectives. While this decision relates to the current electricity network price control, the CRU intends that this approach, including the key elements of reporting and reputational and financial incentives, will further evolve and have wider application for the gas and water network companies. This approach is aligned with CRU s mission to regulate water, energy and energy safety in the public interest and its goal of ensuring best practice regulation. 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 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. 1

3 Under PR4, allowed revenues of 1,961m for the period were provided on behalf of customers to fund the activities of the TSO and TAO. This was set to support total new investment of 1,024m 1, and operating costs of 810m. Reporting and monitoring (Decisions 1-3) The CRU is making the following changes to strengthen monitoring and reporting of how these allowances are spent, and what levels of performance they deliver for customers: A re-positioned Annual Performance Report for the transmission system, jointly produced by the TSO and TAO, providing an accessible summary of network performance. A clear reporting framework for the TSO and TAO documenting the methodology applied to identify investment needs, assess options and deliver these investments for network users. Introducing a new mechanism and trigger point to amend capex or opex allowances during the Price Review period (e.g. where a material change in circumstances are agreed). Incentives (Decision 4-11) 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, were rolled forward for PR4. The CRU is retaining these overall incentive pots for the remainder of PR4, by increasing the pot size for the TSO in 2018, 2019 and 2020 by 0.5% and retaining the 5% for the TAO. The CRU is refocusing the incentives in the following ways: Maintaining the System Performance incentives for the TSO, System Minutes Lost and System Frequency, however reducing the total incentive value compared to PR3. Replacing the PR3 Project Milestones (PM) incentive and the Delivery of Enhanced Network Capacity (DENC) incentives, with a new incentive to assess the quality and rigour of the TSO s end-to-end process for investment planning and delivery. Introducing a similar investment planning incentive for the TAO, focussing on its role in investment planning and delivery (replacing the existing PIP and Construction and Energisation (CE) incentive) 1 All values are in 2014 prices unless otherwise stated. 2

4 Introducing a new incentive for the TSO targeted at its performance in issuing connection offers to all applications processed under the 2018 Batch (as defined in the CRU/18/058, published in March 2018). A re-calibrated outage management incentive, with new financial value placed on the interaction between the TSO and TAO in short-term outage planning. A new stakeholder engagement incentive, providing upside for the TSO for the quality and outcomes/impact of its stakeholder engagement activities. Introducing a new framework to assess performance against the TSO s strategic objectives. A new level of transparency around the TSO s current innovation projects, submitted to the CRU on an annual basis. This reputational incentive will be complimented with new funding available for new innovation projects, where the needs and benefits are clearly demonstrated to the CRU. Collectively, this constitutes a combination of updating existing, proven incentive mechanisms for new data on achievable levels of performance, and introducing new incentive mechanism to focus better on the TSO and TAO behaviours that in CRU s view make the biggest difference for consumers and market participants. These mechanisms will be applied to TSO and TAO performance in 2018, 2019 and Continuation beyond this date is expected and will be considered in the light of evidence on how the mechanisms operate in practice, as part of the PR5 process. Distribution ESBN as DSO/DAO operates the distribution system in real-time, and plans and delivers extensions, maintenance 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 4,127m for the period were provided on behalf of customers to fund the activities of the DSO/DAO. This was set to remunerate existing investment, to support total new investment of 1,837m and operating costs of 1,362m. Reporting and monitoring (Decision 12) The CRU is making 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: A re-positioned Annual Performance Report or the DSO providing an accessible summary of network performance over the previous calendar year. Incentives (Decisions 13-20) 3

5 The total amount at stake through incentives was capped at around 4% of annual allowed revenues in PR3, and was rolled forward for PR4. The CRU is retaining this overall incentive pot for PR4, with this total concentrated over the remaining three years of the PR4 period. The CRU is refocusing the DSO suite of incentive mechanisms in the following ways: A re-calibrated incentive for the DSO s performance in continuity of supply/unplanned outages. This incentive will be maintained from PR3, with the total financial incentive reduced for PR4. A new financial incentive to improve service quality for worst-served customers. Retaining the customer satisfaction incentives from PR3 (National Customer Contact Centre performance and the overall customer satisfaction survey), with updated targets for PR4. Retaining the traditional metering incentive for the DSO, maintaining the value of the incentive from PR3. A new Smart metering incentive for the DSO, based on the roll-out profile set out in the smart metering roll-out plan. The Smart metering incentive will be asymmetric with an upside of 4m and a downside of 20m. A new stakeholder engagement incentive for the DSO to match the incentive developed for the TSO. The incentive will assess the scope, quality and outcomes/impacts of the DSO s stakeholder engagement activities. A new framework for the Strategic Innovation Fund, available for strategic and innovative thinking related to the transition to a low carbon energy system. The assessment will be based on an annual submission to the CRU. A new incentive will be introduced based on the timely processing of connection applications under the Enduring Connection Policy Phase 1 (ECP-1), the 2018 Batch as defined in the CRU s decision of March Collectively, this constitutes a combination of updating existing, proven incentive mechanisms for new data on achievable levels of performance, and introducing new incentive mechanism to focus better on the DSO/DAO behaviours that in the CRU s view make the biggest difference for consumers and market participants. These mechanisms will be applied to DSO/DAO performance in 2018, 2019 and Continuation beyond this date is expected and will be considered in the light of evidence on how the mechanisms operate in practice, as part of the PR5 process. 4

6 Public/ Customer Impact Statement The CRU allows ESB Networks and EirGrid ( the network companies ) charge money towards the cost of building, safely operating and maintaining the electricity system in Ireland. These charges are reflected in customers electricity bills and make up the network companies revenue allowances. The CRU s role is to protect electricity customers by ensuring that the network companies spend customers money appropriately and efficiently to deliver necessary services. The CRU does this through what is called a Price Review which is carried out every 5-years, the current Price Review (PR4) started in 2016 and will end in In order to monitor the network companies during Price Reviews, the CRU requires the network companies to report annually on their activities by way of annual reporting. The annual reports assist the CRU in its decision making and helps inform future Price Reviews. In some instances, if the network companies over perform they are rewarded financially and customers will see an increase in network cost that reflects the increase in the level of services provided to them. However if the network companies underperform the customer will see a decrease in network cost that reflects the decrease in the level of services provided. This provides the network companies with a financial incentive to provide a high quality of service in areas such as customer service and number of customer supply interruptions. The CRU has reviewed best practice, the existing incentives and reporting regime and is now introducing what the CRU considers improvements to the current incentives and reporting regime through the decisions in this paper. The aim is to provide the customer with better value for money and improve quality of services provided to the customer. The incentives will have a direct impact on transmission and distribution tariffs over the period 2019 to 2021 The decisions in this paper will also provide 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. In addition 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. 5

7 Table of Contents Glossary of Terms Introduction Commission for Regulation of Utilities Background Purpose of this decision Related documents Structure of this document Context Industry structure The role of reporting and incentives PR3 reporting and incentives CRU s objectives for PR Transmission reporting Output-based reporting Capex monitoring Capex adjustment process Transmission incentives System performance TSO Investment planning and delivery (IPD) TSO Project delivery TAO Delivering New Connections Outage management Stakeholder engagement Delivering against strategic objectives Innovation Distribution - reporting Output measures Distribution incentives Unplanned outages Worst-served customers Customer service/satisfaction Metering traditional

8 6.5 Metering smart Stakeholder engagement Strategic and innovative thinking Delivering New Connections Incentives as a package TSO incentives TAO incentives DSO incentives Annex A: Responses to Consultation Annex B: Guidance on Annual Output Reporting Annex C: TSO System Performance Incentive Annex D: Guidance on Investment Planning and Delivery annual reporting Annex E: Guidance on Stakeholder Engagement Incentive Annex F: TSO Strategic Incentive Annex G: DSO unplanned outages/continuity incentive Annex H: DSO Customer Service Incentives Annex J: DSO Metering Incentive Annex K: DSO Smart Metering Incentive Annex L: Guidance on Strategic Innovation Fund

9 Glossary of Terms Abbreviation or Term APR CI CML DAO DSO PIP PR3 PR4 RoCoF SF SIF SML SNSP TAO TSO WSC Definition or Meaning Annual Performance Report Customer Interruptions - the average number of interruptions per customer connected in the year (CI) Distribution System Customer Minutes Lost - the average number of minutes without supply per customer connected in the year (CML) Distribution System Distribution Asset Owner ESBN Networks Distribution System Operation ESB Networks Project Implementation Plan The third electricity price control set by the CRU, spanning the period January 2010 to December 2015 The fourth electricity price control set by the CRU, spanning the period January 2016 to December 2020 Rate of Change of Frequency System Frequency (SF) aims to maintain the frequency of the transmission system within a target operating range of 50 +/-0.1 Hz Strategic Innovation Fund System Minutes Lost (SML) is an index that measures the severity of each system disturbance relative to the size of the transmission system. It is determined by calculating the ratio of unsupplied energy during an outage to the energy that would be supplied during one minute, if the supplied energy was at its peak value System Non- Synchronous Penetration Transmission Asset Owner ESB Networks Transmission System Operator EirGrid Worst Served Customer: Typically these customers are supplied on rural single phase overhead networks and experience more than or equal to 5 interruptions in the previous 12 month period and more than or equal to 15 interruptions in the previous 3 years 8

10 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 Background The 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. The 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, the CRU set its price controls for the 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 PR4 Decision, the CRU also committed to update the reporting and incentive arrangements. In December 2017, the CRU published for consultation a range of proposals on how it intended to update the reporting and incentives arrangements for the remainder of the PR4 period, and as a platform for Price Review Purpose of this decision The purpose of this document is to set out the CRU s decisions on the reporting and incentives arrangements to apply for the remainder of the PR4 period, together with the supporting reasoning. This includes details where the CRU s positions have changed, or been refined, in the light of consultation responses and further analysis. The objective of these decisions 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. 9

11 1.4 Related documents Further background relevant to this consultation document can be found in the following documents: CER/17/335 CER/15/295 CER/15/296 CER/10/206 CER/10/198 Consultation on Reporting and Incentives under Price Review 4 Decision on DSO Distribution Revenue for 2016 to 2020 Decision on TSO and TAO Transmission Revenue for 2016 to 2020 Decision on TSO and TAO transmission revenue for 2011 to 2015 Decision on DSO distribution revenue for 2011 to 2015 Consultation Paper Decision Paper Decision Paper Decision Paper 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. Decisions on changes to the reporting framework are set out in Section 3 and for the incentive framework 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 problem being addressed and the action we are taking. We then summarise the supporting reasoning. In developing these proposals, the CRU has analysed the responses to its December 2017 consultation, undertaken further engagement with stakeholders, analysed performance under the PR3 framework, and reviewed practice in other relevant jurisdictions. A summary of the main points and themes raised through consultation is included in Annex A. A total of 18 numbered proposals were included in the December 2017 consultation. For ease of reference we retain the same numbering convention in this Decision. 10

12 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: The owner of the transmission network. ESB Networks builds addition transmission infrastructure at the direction of the TSO, and maintains the existing network. Distribution System Operator and Asset Owner (DSO) ESB Networks: The physical operation of the distribution system in real-time; the planning and delivery of extensions, maintenance and reinforcements to the distribution network, the offering of rights to connect to and make use of the distribution system. Distribution Asset Owner (DSO) ESB 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 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 11

13 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 penalty 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. Table 1 TSO and TAO incentives and performance under PR3 Incentive TSO EirGrid Transmission System Performance - System Minutes Lost - System Frequency Transmission System Development - TSO Project Milestones - Delivery of Enhanced Network Capacity TAO ESBN Transmissions System Development - Issue PIP - Scheduled outages Description and PR3 performance Measure of minutes lost per year (planned and unplanned). <1.5 minutes per year target met in all years of PR3. 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. Incentive for successful completion of project milestones for pre-defined projects. The TSO received positive payments every year under this incentive during PR3. Demonstration of benefits of network solutions, using cost-benefit analysis to quantify benefits delivered in previous periods. Incentive for successful completion of project milestones for pre-defined projects. The TAO received positive payments under this incentive during PR3. 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. 12

14 - Construction and Energisation Incentive linked to spend against agreed PR3 budget submission. Full incentive payment received each year in PR3. Table 2 DSO/DAO incentives and performance under PR3 Incentive Continuity of supply Overall customer satisfaction survey 2 Customer satisfaction Metering Worst served Customer Description and PR3 performance Customer Minutes Lost (CML) duration of interruptions Customer Interruptions (CI) frequency of interruptions. Target met in 2 of the 5 years in PR3. Measure of customer perception of ESBN services (measured through a customer survey). 74% target met every year in PR3 (average performance of 81.6%). 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. 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. 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. At the time, the CRU commented that a number of existing incentives, applicable during PR3, remained relevant for PR4. In addition, the CRU identified areas where significant review was required before the full incentive packages could be introduced. For the DSO/DAO (Ref CER/15/295), the CRU 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 survey incentive. Incentives to reduce the level of electrical losses on the distribution system. 2 Currently carried out by RedC 13

15 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), the CRU 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 mechanisms themselves (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). 14

16 3. Transmission reporting This section sets out the CRU s decisions on the reporting requirements that will apply to EirGrid as TSO and ESBN as TAO, for the period 2018 to In making these decisions, 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 The 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 the 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, dilute the pressures on the TSO and TAO to deliver services effectively and efficiently. It could also constrain the quality of regulatory decisionmaking on behalf of consumers. Decision 1 The TSO and TAO shall jointly prepare and publish a summary report documenting how their activities and behaviours over the previous calendar year have delivered outputs relevant to the needs of customers, market participants and other stakeholders. Consistent with the CRU guidance set out in Annex B 3, the report shall provide a comprehensive and accessible summary of performance using relevant and appropriate performance indicators and metrics. The report of performance during calendar year 2017 shall be published on or before 31 st December 2018, this will be an initial report and based on indicative incentive performance 3 And as might be updated by the CRU from time to time. 15

17 that will not be subject to CRU assessment. Thereafter, each subsequent report shall be published on or before 30 September that will be subject to CRU assessment. Reasoning The decision represents a refinement of the proposal that the CRU consulted on. The core elements of a consolidated TSO and TAO report, combined with more stakeholder-friendly and output-focused content has been retained. The CRU has however strengthened and clarified the guidance to support the decision and has amended the timetables for publication following discussions with the TSO and TAO. The key reasoning for the decision, and the refinements to the proposal consulted on, is set out below. Where relevant, it makes references to points made by respondents to the CRU consultation. The current performance reports prepared and published separately by the TSO and TAO do not, in the CRU s view, meet the objective outlined above to provide stakeholder with clear and easily-digestible information on which to understand performance. The coverage and choice of output measures is partial and limited in the amount of information it provides stakeholders. Further, the separate reporting by TSO and TAO make it unnecessarily difficult for stakeholder to understand the performance they received from the transmission sector as a whole. The approach of obliging the TSO and TAO to work jointly to produce a consolidated report that complies with guidance set by the CRU is a proportionate means of introducing a stepchange improvement in the completeness of reporting and quality of presentation while not being unduly prescriptive. Further, the ongoing obligation on the TSO and TAO under the CRU guidance to seek feedback from users of the report on how it could be improved provides a further channel to ensure that the report remains fit-for purpose over time. The initial CRU guidance reflects input from respondents to the consultation on identified gaps and deficiencies. The revised timetable for publication reflects the reasonable requirements of the TSO and TAO to design and prepare the report, in the first instance and on an enduring basis. The decision to require publication on an enduring basis by September means that the performance report will be available at approximately the same time that tariffs are finalised for the forthcoming year. While the CRU notes that a variety of documents are published by the TSO and TAO on different aspects of their activities to varying degrees of detail and technical complexity, the CRU also considers that the absence of a complete, high-level annual summary of performance from the perspective of stakeholders is a significant omission. This 16

18 additional layer of summary will, among other things, provide a platform from which stakeholder can navigate to other more detailed material. 3.2 Capex monitoring Objective The 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 in its regulatory decisionmaking. Regulatory reporting is a core function of any regulatory price review process. It allows regulators to monitor the progress of companies both 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. Decision 2 The TSO and TAO shall move to an annual cycle of capex reporting. Further, the annual cycle shall include, in addition to the project-level reporting to the CRU, a report designed for stakeholders as a companion document published alongside the new consolidated annual performance report (see Decision 1), with comparable levels of accessibility for the reader. The reporting shall be increased in scope to include reporting on all aspects of investment planning and delivery, from the initial identification of needs based on planning studies through to the delivery and energisation of individual projects. The choice of metrics for the reporting to both the CRU and stakeholders will be informed by the CRU guidance provided under Decision 5 below. The stakeholder report for calendar year 2017 shall be published on or before 31st December Thereafter, each report shall be published by the 30th September following the end of the calendar year being reported on. The timing and scope of the more detailed reporting to the CRU will be agreed between the CRU, TSO and TAO (for example, continuing to report on project progression and project costs). Reasoning The decision confirms the proposal that the CRU consulted on and clarifies certain aspects of how it will operate and interact with existing, more detailed regulatory reporting. 17

19 The key reasoning for the decision is set out below. Where relevant, it makes references to points made by respondents to the CRU consultation. Quarterly, project-level data is unnecessarily detailed, and 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 the 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. The decision increases the range of activities relating to transmission investment planning and delivery where performance is routinely reported on to stakeholders. This increases transparency and accountability, in a manner which is proportionate given the costs and market impacts at stake. It also makes such information easier to understand and engage with for stakeholders, when presented in a clear and consolidated form. In particular it will ensure greater transparency over how needs for transmission investment are identified, and how options to address those needs are evaluated and optimised. There is evidence in other jurisdictions of arrangements that provide much greater transparency on needs and options working effectively in practice. 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 CRU also notes that this form of reporting to stakeholders by the TSO and TAO is, in effect, a summary of the information that will be submitted to the CRU and evaluated under the new Investment Planning and Delivery incentive mechanism set out in section 4.2 below. 3.3 Capex adjustment process Objective The 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 revealed to be needed). 18

20 Decision 3 By 31st March in any given year, the CRU, TSO or TAO may trigger a process to amend allowances by either (a) a submission to the 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. The process may only be triggered if there has been a material change in circumstances (relative to when capex allowances were 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 process, if triggered, will conclude with a determination by the CRU on any applications submitted, and will involve consultation with relevant stakeholder prior to a determination being issued. Reasoning The decision confirms the proposal that the CRU consulted on. The key reasoning for the decision are set out below. 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. Further, a degree of formality of how this process will operate increases regulatory certainty and provides a more transparent 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 19

21 and indirect impacts on the overall capex programme and might also impact on opex 4. 4 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). 20

22 4. Transmission incentives This section sets out the CRU decisions on the incentive mechanisms that will apply to EirGrid as TSO and ESBN as TAO, for PR4. In making these decisions, 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 measured 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 are broadly consistent with the PR3 Decision. For the TSO, this translates to 4.5% of internal opex; for the TAO this translates to 5% of allowed opex. 4.1 System performance TSO Objective The 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. Decision 4 The TSO shall be subject to financial incentives in respect of (a) System Minutes Lost (SML) and (b) System Frequency (SF). The incentive payment or penalty will be calculated based on the difference between actual performance and the levels of target performance set out in Annex C. For the remainder of PR4, the maximum payment for strong performance will be 0.5% of TSO internal opex per incentive. The maximum penalty for poor performance will be 1.0% of TSO internal opex per incentive. The detail of how payments or penalties are calculated with this range is set out in Annex C. Reasoning The decision confirms the proposal to have an incentive mechanism of the form adopted in PR3 that the CRU consulted but adjusts the target levels of performance and the revenue at risk relative to the consultation proposal. The key reasoning is summarised below: 21

23 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 symmetric nature of the scheme means that over-performance is rewarded and underperformance is penalised, and increments in performance are valued at the same rate. Respondents challenged both the incentive targets, and the value of the incentive available for EirGrid. The TSO suggested that the incentive targets were unachievable given the future system operation challenges of managing the transition to I-SEM. The CRU agrees that the TSO will face new operational challenges under I-SEM, in particular, moving to a lighter system, with greater SNSP and a faster RoCoF limit. This will be managed by the TSO through a broader range of ancillary services and improvements to control centre tools (through the DS3 programme). To reflect these new challenges, the CRU therefore has decided to maintain the PR4 SML and SF targets with those set for PR3. These targets better align the TSO PR4 incentives with the I-SEM programme objectives. The total value of the SML and SF upside incentive pot will be reduced from 0.8% to 0.5% of TSO internal opex for the remainder of PR4 (the downside remains at 1.0%). The CRU agrees with one respondent, that there is a strong reputational incentive for the TSO to manage SML and SF, therefore reducing the incentive value is unlikely to worsen outcomes for consumers and that scaling back this aspect of financial incentive will enable other aspects of TSO behaviour to be subject to financial incentive, to the benefit of stakeholders and customers. 4.2 Investment planning and delivery (IPD) TSO Objective The 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. 22

24 Decision 5 The TSO shall be subject to a financial incentive on the quality and rigour of its end-to-end processes for investment planning and delivery. This will encompass how needs are identified, how options are identified and optimised, and how investment schemes are delivered. Overall performance across the full range of activities will be evaluated and reported on annually. The incentive payment shall be set by the CRU informed by of an independent audit. The audit will use a Balanced Scorecard framework proposed by the TSO (with TAO input) and approved by the CRU, consistent with guidance published by the CRU. The initial guidance is set out in Annex D. Based on the audit report and other evidence deemed relevant by the CRU, performance shall be graded as strong, acceptable or below acceptable : Strong = payment of 2.0% of TSO internal opex; Acceptable = payment equal to the reasonable cost of the audit; Below acceptable = penalty of 2.0% of TSO internal opex 5. This mechanism will apply to TSO performance in calendar years 2018, 2019 and Hence the first audit will be undertaken in 2019, reviewing processes and activities during Reasoning The decision confirms the proposal that the CRU consulted on and clarifies certain aspects of how it will operate. The key reasoning for the decision is set out below: In its proposals for consultation, the CRU contended that the PR3 framework for financial incentives relating to transmission investment had significant limitations. In practice, it focused 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. 5 Less the reasonable cost of the audit. 23

25 Further, the CRU s own analysis of performance under the PR3 framework identified 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. The core proposition advocating a broader framework for incentives was supported by the TSO and other stakeholders. One respondent observed that the pass through type nature of the process for setting revenue allowances, in tandem with historically low financing costs relative to the regulatory cost of capital, should be sufficient incentive and an additional incentive should not be necessary. However, the same respondent also observed that in its view the TSO had been slow to deliver investment to support the operation of the market, e.g. to enable non-firm access rights to be made firm. The 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 from a proposal by the TSO (with TAO input) will mitigate this concern. The role of the CRU in setting guidelines for the developed scorecard will ensure balance and completeness. Initial guidance is published as Annex D. 4.3 Project delivery TAO Objective The 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 the TSO does generate the investment plans, the TAO s efficiency and timeliness in delivery can have significant impacts for market participants and customers. Decision 6 The TAO shall be subject to a financial incentive on its performance in contributing to investment planning and delivery. The incentive payment shall be based on performance against a KPI framework proposed by the TAO to be consistent with relevant aspect of guidance published by the CRU. Initial guidance is published as Annex D. Based on performance against KPIs and other evidence deemed relevant by the CRU, performance shall be graded as strong, acceptable or below acceptable : Strong = payment of 4.2% of TAO opex; Acceptable = payment equal to the reasonable cost of the 24

26 audit; Below acceptable = penalty of 4.15% of TAO opex 6. This mechanism will apply to TAO performance in calendar years 2018, 2019 and Hence the first analysis of performance against KPIs will be undertaken in 2019, reviewing processes and activities during Reasoning In its consultation, the CRU set out two options for an incentives framework for the TAO in respect of its role in investment planning and delivery which the CRU recognises is much narrower than the role of the TSO. The reasoning for the decision, which combines elements of both options, is set out below: The role of the TAO within the framework of investment planning and delivery is much narrower that the TSO. 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. 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. The decision provides a framework to enable an appropriate set of KPIs to be developed, based on TAO input but consistent with guidelines set by the CRU. This provides a more flexible and transparent mechanism for ensuring that an appropriate range of evidence is considered in a balanced way, when determining incentive award or penalties for the TAO. 4.4 Delivering New Connections Objective The CRU s objective in putting in place an incentive mechanism for the timely processing of connections applications under Enduring Connection Policy Phase 1 (ECP-1) because new connections are critical to well-functioning, competitive wholesale markets and to the process of 6 Less the reasonable cost of the audit. 25