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NETWORK / 9 / SEPTEMBER 2018 O fgem's stakeholder engage- ment (and consumer vulner- ability) incentive is a reward only annual panel assessment which applies to all network companies, across gas and electricity in both distribution and transmis- sion. All the networks have to present to the panel, led by Ofgem, annually on what they are doing on stakeholder engagements. The resulting scores are published annually, and there are financial rewards attached to this. The panels for this year's assessment took place in July and form part of assess- ments of the companies' customer satisfac- tion performance. Speaking to me at Ofgem's head office in Canary Wharf, London, Kaul said: "If you are seen as being at the vanguard of stakeholder engagement then you receive a financial reward. It's a discretionary reward so we don't have to award it. It depends on the quality of stakeholder engagement and essentially the quality of the work that the network companies present to these panels and how they score it." The incentive is called the stakeholder engagement incentive (SEI) for gas distri - bution and transmission companies, but is called the stakeholder engagement and consumer vulnerability incentive (SECV) for electricity distribution operators (DNOs). While all companies must demonstrate strong engagement with their stakehold - ers in order to be eligible for a reward, the DNOs must additionally demonstrate how they are identifying and addressing cus- tomer vulnerability issues. In the SECV, the consumer vulnerability element is weighted at 25 per cent. The existing incentives will stay in place until the end of the current set of price controls, with transmission and gas distri - bution price controls running from 2013 to 2021, while the electricity distribution price controls run from 2015 to 2023. Kaul told Network the reasons why it is important to incentivise work that is being done in this area: "I think there was a feel - ing in RIIO1 when the framework was setup that network companies were quite insular. "We wanted to reshape it so that it became a lot more outward looking. There were two things I think that were done at the time. One was that stakeholder engage- ment became a big theme in setting the price controls. We set up a process to try and assess how well network companies had reflected stakeholder feedback in their business plans. And then we set up these groups and panels on an ongoing basis to monitor how well they were doing with stakeholder engagement. "I think broadly the signs are that that this has led to a shi– in network company culture and their outlook. They are now much more engaged with their customers." Transparency Some network operators would like to see greater transparency in the panel's scor- ing system and decisions as they think this would help them identify more accurately how they can improve outcomes (you can see the latest results on page 14). Kaul doesn't disagree and says that Ofgem is prepared to listen to ideas about how to make the process more transparent and objective. "Judging the quality of something is in- herently subjective," he remarks. "You can't use a mechanical process so to some extent that is why it is a discretionary system that relies on an expert panel looking at what the companies are saying and then giving them a rating. "We're equally interested in whether us - ing a panel based approach on an ongoing basis is the right way of going about things. Have we done enough in RIIO1 so that the culture is shi–ing and now you don't need to keep rewarding people to talk to their customers as it's just part of how they do business? We'll be thinking hard in RIIO2 about whether we should carry on operat - ing with a financial incentive scheme in the same sort of way." RIIO2 is never far from the surface during my chat with Kaul, who reveals more about the possible changes to the stakeholder engagement incentive in the next set of price controls. "The kind of things we're thinking about for RIIO2 are whether we continue to use a survey based approach to customer satisfac - tion as the lynchpin to how well network companies are serving their customers. And how do we reward that? Do we reward it on a financial incentive basis or a reputational basis? Even if we reward it on a financial basis, do we do it in an absolute or relative sense? Maybe it makes more sense to drive the maximum competition by creating a relative system that says if you're in the top league you'll get rewarded, if you are in the bottom league you'll get penalised. "It shouldn't be the case that just be - cause you meet an absolute target you get a sum of money, you should have some kind of comparison to your peers and how well they're doing with customer services. Those are the sort of areas we need to think about for RIIO2, but the good news is that the cul- ture seems to have shi–ed in the main and a lot more of this is business as usual." Price controls The subject of RIIO2 is next on the agenda during my chat with Kaul so I start off by asking him why the default length of the next price controls will be five years instead of eight? "The main reason we've cut it from eight to five is because of the degree of change in the system," he explains. "In that 2021 to 2026 time period it's going to be very difficult, even within a five-year control, to predict how the net - works might be used and how the demand for their services may change. Even if it had been an eight or 10-year price control period, we would have had to put in some kind of half-way point to reassess the whole system anyway. So you might as well make it simple and reset it every five years." The energy regulator has proposed that the cost of equity range (the amount network companies pay their shareholders) will go down to between three and five per cent, from six to seven per cent currently. The three to five per cent range is the lowest rate ever proposed for energy network price controls in Britain. "So far the only thing we've decided is the methodology for how we go about set - ting the cost of equity," comments Kaul. "We've got a fair amount of data that's telling us if we were setting the controls today the cost of equity would be a lot lower than where we set it in RIIO1." Ofgem's decision on the framework for setting the next price controls also confirms that new independent user groups and customer engagement groups will be set up by each of the companies to give consumers a stronger voice in how the price controls are set. For the first time open hearings will take place in the spring of 2020 where com - panies' spending plans will be scrutinised. "We want to make them pretty tightly structured," notes Kaul. "For that reason, "In the next decade there are going to be quite a few R&D challenges for our networks and they will have to evolve to meet the challenges." AKSHAY KAUL, DIRECTOR OF NETWORK PRICE CONTROLS, OFGEM