SSE plc (formerly Scottish and Southern Energy plc) is a FTSE
100 company based in Perth, Scotland. It took shape out of the
privatization and merger of Scottish Hydro-Electric and Southern
Electric. Today, SSE is the UK's second largest supplier of
electricity and natural gas, the largest generator of renewable
energy, and the only UK energy company involved in electricity
transmission and distribution and gas distribution.
The UK has an 813,000 km transmission and distribution network,
longer than the distance to the moon and back. Scottish and Southern Energy Power Distribution
(SSEPD), a division of SSE, is responsible for maintenance, service
quality, and regulatory compliance for a 182,895 km distribution
network which feeds power from local substations directly into the
homes and businesses of 3.7 million residential and commercial
customers in the UK.
SSEPD is one of six electricity Distribution Network Operators
(DNOs), which service communities in England, Scotland & Wales.
The UK Office of Gas and Electricity Markets (Ofgem) regulates
them. SSEPD assets regulated by Ofgem include one electricity
transmission network (high voltage) and two lower voltage
distribution networks comprising 130,000 km of overhead lines and
underground cables and 106,000 substations.
The TOTEX regulation project
In August 2013, members of SSEPD's senior management team
expressed concerns that the division was being overtaken by other
DNO's in the face of significant changes affecting the industry and
how the regulator judged companies. The most obvious concern was
the pace of change to prepare for RIIO-ED1, the eight-year Ofgem
price control model, which came into effect 1 April, 2015 and ends
The RIIO-ED1 Network Regulation Model, (Revenues = Incentives +
Innovations + Outputs) is the most radical change in UK electricity
distribution regulatory policy since privatisation and Ofgem's most
market-driven, customer-focused model. While Ofgem financial
incentives are nothing new, RIIO-ED1 pushes DNOs much harder to
deliver on all the outcomes customers care about-keeping the lights
on, keeping bills low and making sure people are safe-with tougher
penalties if DNOs don't. For instance, RIIO penalties for planned
and unplanned interruptions are more than double what they were
during the last regulatory period. Previously, customers received
reductions in their bills if the electricity was off 18 hours or
more. Now the threshold is 12 hours. Savings from better
management of unplanned service interruptions and planned shutdowns
are now split between consumers and their DNO. For example, a £100k
of operational savings would be split with £60k for SSEPD and £40k
savings for its customers.
Ofgem's TOTEX (total expenditure) accounting requirement is
another game changer for the DNOs. TOTEX accounting, which
eliminates the distinction between capital expenditures (CAPEX) and
operational expenditures (OPEX), is designed specifically for
capital-intensive, regulated industries. Ofgem regulators
believe the TOTEX approach for utilities will result in more
efficient use of capital to maintain the quality of the electricity
network and reduce bills for customers. For SSEPD and other DNOs,
TOTEX accounting has implications for long-term infrastructure
investment planning, budgeting and routine spending decisions and
for increasing shareholder value.
The RIIO-ED1 message from Ofgem to DNOs is clear: if your
company puts the customer at the heart of operational decisions, it
can perform better financially and deliver better service.
Conforming to that message is hard. It is professionally and
emotionally difficult for any business to change its definitions of
success and drive that shift through an entire workforce. It is
especially challenging for the UK utility industry. Even
post-privatisation, the vestiges of its regulated monopoly roots
In October 2013, SSEPD asked VISION to help the division get
ready for RIIO, and to use this transition to make a larger change
in its operations and culture. The goals of the project were to
design a TOTEX-based capital management model and implement
processes to alter how SSEPD manages network maintenance. To do
this, VISION partnered with SSEPD to drive broader organisational
and behavioural changes, and build new competencies. With
VISION's arrival, senior management made a commitment to drive out
elements of the firm's legacy culture that were unfit for purpose
and to ensure it remains the leader in the UK's electricity sector
and the energy industry as a whole.
Results for SSE
The impact of the first year of VISION's work reveals itself in
financial returns, culture change, and industry leadership:
Financial returns. The VISION and SSEPD project's
incentive value, created over the regulated period, will be in
excess of £100 million. Prior to VISION's arrival, SSEPD was
projecting a loss of £1.2 million a month as measured against
Customer Interruptions or Customer Minutes Lost. TOTEX savings on
each circuit is averaging 15%. Circuit work completed so far has
generated about £2 million in savings with £7 million more
projected for the next 12 months.
Organisational and cultural change.The TOTEX-based Value Model
has become the common frame of reference for investing, maintenance
and compliance budgets. SSEPD managers use the Value Model to
explain to the regulators work priorities and delivery plans.
Before there were CICs, when a field unit manager started a
project, he would simply say, 'I'm starting now. I will tell you
how much it costs when I'm finished.' CICs create a promise based
on six key variables: manpower, cost, resilience, compliance,
health and safety and date of completion. Field unit managers now
make promises on each.
The growing use of CIC's has instilled a new 'culture of
completion' for network maintenance that encourages looking at the
big picture and confidence in achieving big goals. Managers take a
broad view and develop in their CICs plans to mitigate all the
situational challenges. That planning discipline gives the managers
the confidence they can deliver what they promise.
Industry leadership. The VISION project is one of the first in
the electricity industry to create a TOTEX-based investment
management model. The approach is already showing results that give
SSEPD leaders and teams a high degree of confidence they can
achieve RIIO's new and challenging goals and sustain the firm's
future leadership in the industry.
Read the full case study