Electricity Distribution Price Reviews (EDPR or Price Reviews) are a sales process. Utilities need to sell customer outcomes to the Regulator. The Regulator, a proxy for the customer, wants proof that identified outcomes can be delivered and provide value for money. Utilities need to manage this tension between delivering customer outcomes and optimising the most appropriate investment plan.
The UK started this customer-centric approach to price reviews over 10 years ago and there are lessons to be learned that could be applied in Australia during upcoming price reviews. There are three areas that utilities should focus on.
- Further customer engagement to find the optimal balance between outcomes and willingness to pay
- Use of asset management data and expert systems to link investment and customer outcomes
- A greater role for boards in signing off the business plans
Customer engagement is key
Over the last five years, the engagement and participation of customers in the Price Review process has increased, encouraged by the Regulator. Generally, the opinion of customers was sought on what improvements to service should occur. To date, engagement inputs often worked in parallel to investment plans; it was often unclear how investment plans were influenced by customer input. It is critically important they are linked, coordinated, and managed as they are key building blocks within the overall business plan.
As the Australian regulatory regime catches up to the UK, the requirement on regulatory submissions is to show explicit links between the customer and investment in the business plans will become more pronounced.
Use systems to support the process
A host of asset investment planning (AIP) systems and solutions have been developed (and tweaked) to promote better linkages between the customer and asset investment. Solutions such as Copperleaf, Powerplan and Arcadis Gen are prevalent in the Australian utilities market.
The challenge for many utilities, particularly in Australia, is how to best use such solutions. They are often used as repositories of data, relegating their utility to simple reporting or calculations to support ‘stand-alone’ investment plans during the price review process.
When utilities do get it right, AIPs can play a critical role in driving customer-outcome regulatory reviews. Evidence from the UK shows that they are being used to optimise the ‘what-if’ scenarios such as determining the investment required to meet customer outcomes. They can also be used to balance the economics of investment of customer outcomes where willingness to pay is described in monetary terms.
These scenarios should be used to inform all stakeholders, both internal and external on the trade-off between customer outcomes and affordability. The feedback of the consequences of stated preferences will itself change preferences. This will have the knock-on effect of further aligning the investment plan to the customer expectations. This helps to answer the key question for a price review: “Why is your business plan optimal for your customers?”.
More examples again from the UK have demonstrated that using such tools to scenario test investments on an on-going basis can drive better realisation of incentive payments and mitigate the risk of penalties.
The Board must be involved more than ever
Regulatory reviews are the single biggest influence on the utility’s revenue and are a board level discussion. They become a strategic review of the utility services, involving the customer, the cost of the services and the expectation of a reasonable return. As with the customer, the tools and data become a mechanism to engage the board to align customer outcomes with their other compliance requirements. The use of scenario outputs from the AIP tools allows clear articulation of the balance between customer and organisation needs, allowing this to also be brought into customer engagements.
The Regulator expects an improved quality of business plans, particularly as it relates to the connection of customer outcomes to the investment plan. Companies need to explicitly show this linkage. The EDPR submission must be optimised to deliver value to customer. This must be evidenced and sold to the regulator and customer alike.
Mark Engelhardt, MHC Advisor