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UK power distributors face Ofgem carrot and stick

UK electricity and gas regulator Wednesday finalized its new scheme for establishing service quality targets for electricity distribution companies and with it a system of financial rewards and penalties linked to the new standards.

Ofgem said the proposals would place stronger incentives on electricity distribution companies to deliver better services, in particular fewer and shorter power cuts.

The scheme affects the 14 electricity distribution companies operating the regional networks where electricity is conducted through underground cables and wires on poles to homes and businesses.

The proposals form part of Ofgem’s Information and Incentives Project (IIP) developed to tackle weaknesses in the existing price regulation framework and achieve the right balance between reducing costs while delivering quality service. Under the IIP scheme, electricity distributors will be given incentives related to the number and duration of disruptions to service.

Companies that do not meet these targets will face annual penalties of up to 1.75 per cent of their revenue. However, if they beat the targets, they will be allowed to earn extra revenue based on how well they have improved standards during the next three years.

Also, companies will face annual penalties of up to 0.125 per cent of revenue for poor quality of telephone responses with a corresponding increase in revenue for improved performance. Targets for speed of responses will be introduced in 2003.

Ofgem Strategy Director, Joanna Whittington, who is leading the project, said, “Customers deserve a quality service and, under this scheme, they will be able to see how well the companies are doing in meeting their targets”.

Ofgem said that the scheme clarified the demands being made on distributors and offered the right balance between risk and reward.

Each of the 14 distribution companies has until Monday 29 January 2002 to decide whether or not to accept these proposals. If accepted, the incentive scheme will come into effect from next April.

Separately, Ofgem published its guidelines for the supply of “green” energy. These were prompted by the introduction of the Climate Change Levy renewables exemption (since 2001) and the Renewables Obligation due to be introduced in 2002.

The guidelines define key terms of what forms of generation constitute “green energy”, explain the key features consumers should expect from a “green’ tariff and describe which rules, regulations and guidelines apply in this area.

Ofgem has also today its final procedures for administering the Energy Efficiency Commitment (EEC) target between 2002 and 2005. Set by the Department for Environment, Food and Rural Affairs, the Energy Efficiency Commitment replaces the Energy Efficiency Standards of Performance in 2002 and will be administered by Ofgem.

The final procedures set out the ways in which suppliers are expected to meet efficiency targets. All energy companies supplying at least 15 000 customers will have a target which they will have to meet, through providing and installing energy efficiency measures in homes.