Developing quality incentives

1. Developing quality incentives Cemil Altin Head of European Gas Policy November 2006

2. The situation in 1999 • Ofgem are undertaking a price control of electricity distribution companies • There is concern (industry, academic, and at Ofgem) that the strong efficiency incentives under RPI-X may be discouraging good quality of service to consumers • There is some quality of service “protection” in place BUT it is targeted payments to individual customers (guaranteed standards of performance) and non-financial overall standards of performance • The industry have their own approach to reporting on network performance (e.g. number and duration of interruptions to supply)

3. What should we do? • Impose incentives to deliver better quality of service? • Do nothing? • Assess customers’ preferences • Reduce efficiency incentives to redress the balance?

4. The first step • Assess customers’ preferences and willingness to pay (using extensive survey) • Customers’ preferences – what aspects of quality of service are important/valued • Customers’ willingness to pay – how much are they willing to pay for improvements • Result: • customers value number and duration of interruptions and receiving a good response when they contacted the company in the event of an interruption • they are willing to pay a modest amount for improvements in quality of service – not an “open-ended cheque”

5. What should we do now? • Set targets for the areas that customers’ value • Look at past performance and understand the data • Set a financial incentive – e.g. £10 per unit improvement

6. Review data and performance • We reviewed the data on number and duration of interruptions to supply • Found that companies using significantly different definitions and ways of measuring number/duration of interruptions • Up to 40% of differences in performance could be attributed to these factors • What do we do now? • Set incentives anyway (but keep the financial exposure very low to overcome data problems)? • Develop better reporting arrangements?

7. Developing better reporting • Ofgem developed standard reporting arrangements – detailed definitions • Ofgem developed accuracy reporting requirements – and began to audit companies’ data • Begin to build confidence in the data and therefore confidence in any incentive – allows greater financial exposure and therefore ability to change behaviour

8. Now we have better data – what do we do? • Develop the incentive arrangements • What type do we want? • Just set a £/unit improvement • Set targets and incentivise delivery • Remember – not an open-ended cheque • What about the quality of response when customers contact companies?

9. The incentive arrangements • Targets for number and duration of interruptions to supply – a rate of improvement over 5 years (with annual targets) • A monthly survey of customers that had contacted companies to assess the quality of their response • Now…..how strong to make the incentives? • The data on customers’ willingness to pay was not ideal/differed across companies

10. The strength of the incentives • Decided that 2% of price control revenue was appropriate level of exposure given it was a new scheme (and remaining worries about data) and also overall risk profile • The 2% was “divided” between the 3 measures based on customers’ relative preferences • Companies received a symmetric penalty/reward for beating targets on number/duration of interruptions • Companies received a fixed reward for improving performance under the customer survey to assess their quality of response

11. Did it work? • Yes – improvements in performance across all 3 measures for most companies • Yes – a real change in behaviour – directors’ pay linked to performance and attitudes in call centres • Yes – provided a balance against the strong efficiency incentives on costs • No – targets possibly not hard enough – but can be reviewed with experience

12. Promoting choice and value for all gas and electricity customers