Response to. Consultation on ESB Networks Ltd Incentives for Delivery of Distribution Capital Assets over 2011 to 2015 (CER/11/043)

Transcription

1 Response to Consultation on ESB Networks Ltd Incentives for Delivery of Distribution Capital Assets over 2011 to 2015 (CER/11/043) 12 April 2011

2 Introduction Our primary concern with the proposed incentive mechanism for delivery of distribution capital assets over the period 2011 to 2015 by ESB Networks relates to the fact that it has been produced by the primary beneficiary in the first instance ESB Networks and hence, prima facie, would be overly generous and structured to favour that principal beneficiary. Our response addresses exclusively the structure of this incentive mechanism. Analysis of ESB Networks Proposed Incentive Mechanism ESB Networks has proposed a straight-forward methodology, which utilises straight line extrapolations. While the simplicity is appreciated, it imperceptibly fails to capture the alignment of risks and rewards. The impact of the failure of ESB Networks to deliver any aspect of their distribution capital assets programme is described in the organisation s own words in their submission to the Commission, thus if any particular CapEx programme is delayed, or not fully delivered, there will be associated impact on the benefits that the programme was due to deliver. From this perspective, it is important to the customer that the full approved CapEx plan is delivered during the control period, to ensure that the full benefits of the plan are realised. In essence the closer delivery of assets approximate the plan, the nearer to realisation of the full benefits implied. On this basis, an 85% rate of delivery of assets reaps more of the anticipated benefits than a 75% rate. Consequently, the incentives should be skewed towards achieving the greatest benefits possible. Hence on this basis, the straight line methodology proposed by ESB Networks fails, as it is indifferent to the greater benefits obtainable from an 85% rate of delivery compared to a 75% rate as it rewards ESB Networks equally (in relative terms). Equally on the penalty side, a 45% rate of delivery is essentially equivalent to a 35% rate. Also, the indifference or neutral boundaries (dead-band) that ESB Networks has chosen between the 55% and the 65% rates of delivery are absurdly low as to be meaningless. They propose to be held whole while just about half of the benefits anticipated from the capital assets delivery programme fail to materialise? This is patently unreasonable and does not align with their statement to the effect of ensuring that the full benefits of the plan are realised. On those bases we recommend that the methodology as proposed by ESB Networks be modified as described below to account for these identified weaknesses.

3 Alternative Incentive Mechanism To provide strong incentives towards full delivery, and hence obtaining full benefits, rewards should be stacked towards the full delivery point. Mathematically this will be achieved by applying an exponential function to the incentive structure, that ratchets up the rewards to be reaped by ESB Networks the closer they deliver assets according to plan. This method will help balance the asymmetry of risks and rewards between ESB Networks and the distribution network customers. In corollary on the penalty side, exponentiation should also be applied to slow down the exposure of ESB Networks to slippages, but accelerate as the rate of delivery declines. An additional benefit of this method is that even if delivery slippages occur, incentives still remain on ESB Networks, even if it is one of avoiding even heavier penalties. To guide the exponentiation, as well as to trace a value-path explicating the relative significance of the various rates of delivery, we suggest the use of target values. This methodology is outlined in the appendix below using the chart insert. The data underlying it is also provided. To discuss this document contact: Emeka Chukwureh emeka.chukwureh@sserenewables.com

4 APPENDIX Chart 1 Incentive Structure Employing Exponential Function

5 Table 1 Data Table for Chart 1 Delivery Rate Penalty/Reward Target ( 'm) y=exp(x) x Delivery Rate Penalty/Reward Target ( 'm) y=exp(x) x Note: It is not intended that the Commission adopt these values. They have only being used for illustrating the alternative incentive mechanism being proposed.