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Response to Ofgem’s consultation ‘Allocation of voluntary redress payments in the context of enforcement cases’

30 September 2016

Citizens Advice response to Ofgem's consultation, 24th August 2016 

Citizens Advice is pleased to respond to Ofgem’s consultation on implementing an Operational Performance Regime (OPR) for the Data and Communications Company (DCC). Broadly, we believe that Ofgem is adopting a sensible approach to the design of the OPR.

The DCC’s activities are novel and there are no comprehensive comparators in the UK to benchmark good performance (though there are likely to be imperfect comparators that Ofgem should make use of). This presents significant risk that incentives could, particularly at the start of the DCC’s activities, drive the wrong behaviours or incentivise behaviours inefficiently. It will therefore be crucial to review the Operational Performance Regime’s success early on in its existence. We recommend a thorough review of the OPR within two years of its operation.

One of the significant challenges for designing the OPR is making relatively little at-risk margin drive the right behaviours as successfully as possible. However, it is possible to overstate this challenge. While the £2-3m put at risk each regulatory year is far smaller than many incentives for other monopoly businesses Ofgem regulates (you highlight the £30m per year available through the Balancing Services Incentive Scheme), characterising incentives purely in absolute terms could understate the potential for this incentive to drive behaviour change. £2-3m is roughly 10% of the DCC’s revenue in the last regulatory year — proportionately, its potential value is in excess of many network company incentives. This does not undermine the case for a tightly defined, limited and focussed set of incentives, but nor should it dilute Ofgem’s ambition for the scale of behaviour change that these incentives should seek to drive.

The scope for incentives to drive behaviour is also determined by how challenging it is for the DCC to meet their targets. We note that the Licence only permits downside risk and forbids any reward for outperformance. While a balance must be struck to ensure that incentive targets can be realistically achieved, we believe that the incentives must be high risk for the DCC in order to drive excellent performance within the Operational Performance Regime.

Finally, we would like to reiterate our call for greater clarity regarding the timetable for transition to ex-ante regulation. We understand the case for opting for ex-post regulation in the first instance, when the DCC’s costs are uncertain and - to a considerable degree - unforecastable. We welcome the OPR as part of a transition towards ex-ante regulation, and recommend that a timetable for implementing ex-ante regulation for all of the DCC’s core activities should now be set out.