An Coimisiún um Rialáil Fóntais Commission for Regulation of Utilities An Coimisiún um Rialáil Fóntais Commission for Regulation of Utilities PR5 Regulatory Framework, Incentives and Reporting Decision Paper Reference: CRU/20/154 Date Published: 18/12/2020 0 An Coimisiún um Rialáil Fóntais Commission for Regulation of Utilities CRU Mission Statement The Commission for Regulation of Utilities (‘CRU’) mission is to protect the public interest in Water, Energy and Energy Safety. The CRU is guided by four strategic priorities that sit alongside the core activities we undertake to deliver on the public interest. These are: o Deliver sustainable low-carbon solutions with well-regulated markets and networks; o Ensure compliance and accountability through best regulatory practice; o Develop effective communications to support customers and the regulatory process; and o Foster and maintain a high-performance culture and organisation to achieve our vision. Executive Summary Every five years the CRU publishes a Price Review that determines the amount of revenue that EirGrid and ESB Networks (collectively the “network companies”) can collect from customers over the next five-year period. The current period, “PR4”, will come to an end at the end of this year, 2020. The next period, “PR5”, will cover 2021-2025. In addition to the allowed revenues, each Price Review outlines the set of arrangements that apply to how the network companies will be incentivised, how unexpected expenditure will be treated, and how under and over expenditure will be addressed. With potentially more unforeseen changes to the electricity sector, the regulatory model for PR5 will need to place more emphasis on the results that the network companies’ activity need to deliver (their “outputs”) rather than how they carry out that activity (their “inputs”) to deliver those outputs. This means, the regulatory framework needs to be ‘agile’ and allow the network companies to adapt to changing circumstances delivering value to customers more quickly. More generally, customers would benefit from a regulatory framework that places more emphasis on the outputs being delivered rather than on the inputs being used. As this puts the focus of the process on what matters for customers, allowing the network companies the flexibility to do this is in the most cost-effective approach rather than “sticking to the plan”. In PR4 the CRU developed a regulatory framework that put greater emphasis on outcomes (rather than processes) for customers and on facilitating innovation in the Transmission System Operator (TSO) and the Distribution System Operator (DSO). For PR5, the CRU wants to build on the successes of the PR4 approach and continue to incentivise efficient costs, enable necessary investment, and hold the network companies accountable for delivering what customers need. 1 An Coimisiún um Rialáil Fóntais Commission for Regulation of Utilities The Climate Action Plan 20191 (the ‘CAP’) sets targets that include 70% of electricity coming from renewable generation sources by 2030; increased uptake of micro-generation (including ‘prosumers’ selling power to the grid); and all new cars and vans sold in 2030 being electric (resulting in 950,000 EVs on the road by 2030). The network companies have an important facilitation role in the CAP and so it is important that the PR5 Regulatory Framework enables them to do so, while protecting customers’ interests through effective oversight. 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. In deciding on the right reporting framework an important consideration is the balance between the volume of data and the accessibility of the information that the data provides. The CRU and stakeholders must have sufficiently detailed information to make informed decisions on relatively complex issues and must ensure that information on the areas that matter most to stakeholders is readily available and accessible to a wide audience. The decisions set out in this Paper, build upon the reporting framework established in PR4, and aim to achieve that balance through differentiating between reporting intended to inform a wide audience, technical information intended for industry participants, reporting that will be an input into the annual review process by the CRU and lastly, detailed regulatory information collected contemporaneously for review in the next five-year Price Review. This Paper sets out the enhancements to the current 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. The objective of the PR5 reporting and incentives remains consistent with PR4, which is to ensure that network companies are focussed on: o delivering better outcomes for customers, o using innovation to deliver services more efficiently, and o meeting key national strategic objectives. The CRU intends that this approach, including the key elements of reporting and reputational and financial incentives, will further evolve as part of the PR6 process. This aligns with CRU’s mission to regulate water, energy and energy safety in the public interest and its goal of ensuring best practice regulation. 1 Climate Action Plan 2019: https://www.dccae.gov.ie/documents/Climate%20Action%20Plan%202019.pdf 2 An Coimisiún um Rialáil Fóntais Commission for Regulation of Utilities Regulatory Framework: Building Blocks The building blocks of the PR5 Regulatory Framework are set out in Figure 1 below. They can be considered in three broad categories, all of which will be supported through an enhanced reporting and monitoring framework: o the ex-ante setting of allowances, outputs and deliverables; o the incentivised delivery against those using the Agile Investment Framework as required; and o the ex-post review in the next Price Review process. The ex-ante process will have three main components. In terms of the inputs, there will be no change from the current PR4 framework. Inputs will be set on an Opex and Capex basis respectively and will be used to determine the network company’s allowed revenues, against which an efficiency challenge will be set. The move to an output-based approach is new to PR5 and so the CRU will be introducing a transitional approach. This will mean that outputs that can be well defined and clearly linked to inputs will be assessed. This approach will allow the network companies a level of flexibility to reallocate revenues between the inputs associated with that output (while maintaining the distinction between operational and capital expenditure). The CRU considers that this approach should facilitate innovation and improvements by incentivising the network companies to focus on delivering the outputs most relevant for customers and market participants. Once the allowances are set, in the delivery phase over PR5 there are four main components: 1. cost incentives; 2. performance incentives; 3. the Agile Investment Framework; and 4. enhanced reporting and monitoring. Cost incentives allow the network company to keep some or all of the difference between the allowance and efficiently incurred expenditure. The performance incentives for PR5 build upon the PR4 incentives by retaining most of the PR4 mechanisms with updated targets, and the introduction of some new mechanisms to incentivise network companies in the delivery of the PR5 objectives. The Agile Investment Framework comprises mechanisms to allow access to additional revenues in response to the changing needs of the system and to facilitate a flexible approach to network investments. The CRU considers that the Agile Investment Framework is an important part of the PR5 Regulatory Framework as it can address the uncertainties for the PR5 period, ensure customers are protected against unnecessary costs, and provide the revenues needed to deliver on the CAP as the associated investments become necessary. Supporting regulatory oversight of this delivery period is provided through the enhanced 3 An Coimisiún um Rialáil Fóntais Commission for Regulation of Utilities reporting and monitoring framework which the network companies will be required to adhere to. This involves the publication of clear, concise, and accessible reports on the network companies’ performance and network delivery. In addition, annual regulatory reporting to the CRU will provide a clear link between the ex-ante allowances and deliverables, spending decisions taken by the network companies during the PR5 period, and the holistic review of the network companies performance over the PR5 in the ex-post review. The reporting framework will allow the CRU to conduct effective oversight of the network companies while also allowing for greater flexibility in response to innovation and changing circumstances. The information and experience gained through this reporting framework will also facilitate the expansion of the output-based approach in PR6. The Agile Investment Framework consists of five mechanisms: 1. the Uncertainty Mechanism, releases revenues