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Benchmarking
Benchmarking service quality service quality
in UK electricity
distribution networks
47
Vinh Sum Chau
Norwich Business School and ESRC Centre for Competition Policy,
University of East Anglia, Norwich, UK

Abstract
Purpose – The purpose of this paper is to review the evolution and development of customer service
performance measures in the electricity sector since privatization in 1989, and then examine the impact
of a specific recent energy regulatory requirement (known as information and incentives project (IIP))
on the organizational management of an exemplar electricity distribution company. Also discussed is
how the sector has tried to learn from benchmarks from a number of such literary disciplines as
economics, marketing service quality, and total quality management.
Design/methodology/approach – The research first presents a survey of the historical development
of performance standards based on archival documentation. It is then augmented by the employment of a
longitudinal “tracer study”, involving the isolation and firsthand real time qualitative observations of a
company’s key strategic and operational activities, to understand how they related to the other
organizational phenomena at large. This process spanned an investigative period of two years.
Findings – The paper finds that much of the early standards used in electricity immediately after the
sector’s privatization rested much on those in the water and gas safety sectors, which themselves were
then admittedly inadequate in UK. The IIP, a complementary set of service quality standards,
worked on these early problems, but the implementation of the new scheme proved problematic and
warranted major organizational reengineering, as shown in the exemplar company, ElectriCo. IIP has
impacted on organizational management mostly in the areas of: higher-level strategic change, causing
noticeable internal confusion during strategic transitions, building a performance management
system, improvements in performance data, and establishing more effective ways for management.
Research limitations/implications – While the case example used in the research is a regional
monopoly and is a good representation of the context in which the service standards operate, the
findings are limited to the one company. It is a UK specific context without international comparison.
Originality/value – The research has combined archival research with an innovative firsthand
methodological approach (tracer studies). Its value is in how the story of service standards in
electricity (and specifically distribution) has been augmented from the early customer service
standards to the most recent IIP considerations. It also looks from within the company, which has been
missing in longstanding research in the more traditional disciplines such as economics.
Keywords Electricity industry, Benchmarking, Customer services quality, Performance management,
United Kingdom
Paper type Research paper

1. Introduction
The last decade has witnessed a growing number of consumer representation groups and
regulatory bodies in UK. This has highlighted the increasing recognition of public interest Benchmarking: An International
concern (and even safety) in sectors which provide essential services and for which there Journal
Vol. 16 No. 1, 2009
is limited competition and little (or no) consumer choice. Clear examples are evident in pp. 47-69
the recent failure of the British Railtrack model of managing and in Transco’s record q Emerald Group Publishing Limited
1463-5771
fine of £15 million for the culpable homicide of a family of four in Larkhall (Scotland, UK). DOI 10.1108/14635770910936513
BIJ A wealth of literature has discussed the state of UK privatized utilities (Cooper et al., 2001;
16,1 Parker, 1998; Jones, 2000) after the Labour government came into power in 1997 and their
attempt to modernise the regulatory framework (DTI, 1998). Now over a decade later, this
paper looks specifically at the benchmarks for, and early impact of, one specific
regulatory initiative that has recently (since 2002) been introduced in the UK electricity
distribution network – the information and incentives project (IIP).
48 The concept of benchmarking has long since been considered important in the
management literature, particularly in operations management (Watson, 1993; Yasin
and Zimmerer, 1995; Soltani and Lai, 2007), but it has yet to be settled in its application
to governmental policy and practice (for a review of recent benchmarking literature,
see Dattakumar and Jagadeesh, 2003; Kyro, 2003; Northcott and Llewellyn, 2005). The
meaning of benchmarking in this paper is regarded as the comparison of practices
inside and/or between organizations in order to identify best practices and areas for
improvement. Benchmarking: An International Journal has reviewed extensively how
benchmarking can be of use in the services sectors and the relation to overall firm
performance (Anderson and McAdam, 2004; Bhutta and Huq, 1999; Carpinetti and de
Melo, 2002; Dawkins et al., 2007; Kumar et al., 2006; Maire et al., 2005; Sharif, 2002;
Yasin, 2002). These well-established principles have however long been omitted in
understanding institutional relationships, so this begs the question of why that is so
particularly when there are gains that can be sought from the principles of transferring
good management practices to contexts that perhaps require these most. Given that
service sectors, particularly those that are essential to consumption as well as carry
health risks (such as essential household utilities), are probably in most need of
continuous quality improvement, it is of value to explore how this can be so done
(Saunders et al., 2007) and not just to evaluate performance data.
This paper draws on a longitudinal research project on the strategic control
implications of regulatory constraints for management in UK monopoly network
utilities (for details, see Chau, 2006). The paper is principally in two halves:
(1) the first presents a story of the service standards in use prior to IIP’s
implementation; and
(2) the second, its consequences since it went live in April 2002 for an exemplar
company.

The latter part is particularly interested in the managerial/organizational responses of

the teams managing regulatory constraint to externally imposed performance criteria.
Hence, the paper begins by explaining the full methodology of this paper employed,
then a discussion of issues relating to the regulation of service quality in UK utility
industries, and how this was benchmarked to others. It then outlines the key
components that make up the IIP scheme, with some details of the lessons it has gained
from experiences elsewhere. The regulation project is then explained in relation to IIP’s
actual impact upon the company’s management, and these issues are discussed. The
paper ends with some views on IIP, with respect to its appropriateness of purpose as a
regulatory tool, and implications for future developments. The value and contribution
of this paper is in the presentation of the service standards pre- and post-IIP and their
usefulness for benchmarking exercise, as well as the internal view of the organization
that is not normally disclosed in more conventional and longstanding disciplinary
studies (Chau and Witcher, 2005a).
2. Methodology Benchmarking
2.1 On service standards prior to IIP’s implementation service quality
An extensive review of literature from the regulation policy perspective, drawing
mainly from the longstanding economics perspective, was first pursued. From this,
explanations of the underlying principles of benchmarking in utility regulation are
explained in the specific context of UK. Some empirical data on the performance of
the electricity distribution sector are presented to illustrate the problematic nature of 49
the constantly improving attainment levels over time. These archival data came from
a quantitative survey which looked specifically at UK utilities service standards
(Chau, 2002; Waddams Price et al., 2002); the dataset resulted from compiling annual
performance data of each of the electricity distribution companies published by the
energy regulator, Office of Gas and Electricity Markets (OFGEM).

2.2 Organizational implications of IIP after implementation

2.2.1 Research method. The findings presented in this paper on the impact of IIP come
from another project (Chau, 2006) which looked specifically at the qualitative
implications of such service standards. The firsthand methodological approach used in
the latter part of this research paper is known as longitudinal tracer studies. Dating
back to its first use in organizational studies by Woodward, tracers concern:
[. . .] the isolation of a particular order or batch of products, central to and representative of
the firm’s [. . .] activity, and by following its progress through the planning, execution and
feedback stages of the control system, observing the way in which people become involved in
plans, decisions and tasks relating to it (Kynaston Reeves and Woodward, 1970, p. 40).
The approach is facilitated by the use of “tagging” (Hornby and Symon, 1994) whereby
key issues are continually monitored, such as various IIP standards, to allow the
unfolding of other important issues during the research. In the research, three key tags
were used in the electricity distribution company, which were conveniently the
customer interruption (CI), customer minutes lost (CML) and telephone response
standards which make up IIP. The significance of this methodological approach is that
it allows an examination of the detailed implications for management which are
normally ignored in traditional economic modelling research, such as that of Giannakis
et al. (2005), for example, and this is an important contribution of this paper, as
“longitudinal studies are infrequent” (Gurd and Thorne, 2003, p. 23) and they “provide
a better focus on the long-term impacts on decision-making and broader behavioural
impacts” (p. 24).
Hence, the research involved following through in real time key elements of new
regulatory incentives all established at the time of IIP being implemented to explore
how the researched company responded to them and to assess the extent of this impact.
In other words, key aspects of the policies were used as vehicles to guide the research
and to examine the strategic management of the daily activities within the electricity
distribution company – for reasons of confidentiality, it is referred to in this paper as
ElectriCo. The selection of which policy incentives to follow through was dependent
upon their importance from the points of view of regulators and the company itself
(either as competencies or weaknesses).
2.2.2 Data analysis. Following Laughlin (1995), these key elements served the role of
tags, and were guided by a skeletal theoretical framework, which over time became
gradually fleshed out by the empirical details abstracted from the researched setting
BIJ (for a detailed explanation of this approach, see Chau and Witcher, 2005b).
16,1 The framework used for this purpose was Simons’ (1995) model of strategic control
levers, and the data were grouped within its sub-categories of beliefs systems,
boundary systems, diagnostic control systems and interactive control systems (which,
according to the model, are exerted in a balanced mutuality to achieve corrective action
of medium term objectives and long-term vision upon minor deviation or significant
50 impact), where they were subsequently content analysed.
The data were collected predominantly through a series of about 40 semi-structured,
open-ended interviews with senior and middle managers in regulatory and corporate
strategy departments. They were compared against additional published regulator
reports and internal company documentation of the same research period (between
April 2002 and May 2004). This process formed a pool of data which was entered onto
a self-maintained database of respondent quotations and commentary (Chau and
Witcher, 2004). Data analysis followed the guidelines of Huberman and Miles (1994) on
three distinct stages of qualitative data analysis:
(1) data display;
(2) reduction; and
(3) conclusion-drawing.

By reflecting on the issues from the research which surfaced and by using these to
extend the preconceptions about the impact of regulation upon management where
necessary (Laughlin, 2004), interesting insights about the impact of IIP, among other
things, emerged.

3. Service quality in monopoly network utilities

3.1 The imperative for economic regulation
The major privatization programmes of UK in the 1980s/1990s were the outcome of the
intention to remove the public sector requirement’s burden and to expose it to more
competitive environments (Jones, 2000), to promote greater efficiency. But:
[. . .] whether the privatization programme proves to be successful will largely depend upon
the regulatory framework adopted; that is on whether the natural monopoly elements can be
successfully monitored and controlled while ensuring adequate service and supply, and on
the impact of competition on the non-monopoly parts of the business (Helm and Yarrow, 1988,
p. ii).
In the utilities industry, where fully/sufficiently competitive environments are not
achieved, the general public’s interests are at risk, either through price exploitation, or
through the degradation of quality of supply and customer services. Such conditions
are possible where a privatized firm’s interests are in raising shareholder value by
increasing dividend payments rather than reinvestment of profits for the improvement
of the network. The renowned Professor Littlechild of UK, writing at the time for
telecommunications, who later became the first Director General of Electricity Supply,
argued that “regulation . . . is [merely] holding the fort until competition arrives”
(Littlechild, 1983, p. 7). Where regulation sits as a proxy for the missing competition,
levels of service quality and prices must be stipulated by the economic regulator. If this
is the case, how best is it to regulate or to bring in the long awaited for competition, and
from which other existing industry to learn the answer?
 In the case of natural monopoly network utilities – where essential services are Benchmarking
delivered through “pipes and wires” (NAO, 2002) – the industry is characterised by service quality
falling average variable costs, and it is impracticable to break down the network and
open each part to competition; total costs are only minimised when the entire output of
an industry is supplied by a single producer, and for consumers, the addition of the
extra user (marginal cost) reduces the average cost of operating the network per
consumer. However, as the network provider becomes larger (increasing its market 51
power), the potential entry to the market of a rival incumbent becomes smaller, and
renders it even more difficult to imitate a competitive environment. So there is a greater
potential for the abuse of the dominant market power, exerted by either charging
higher prices, or providing lower levels of service standards, to its customers.

3.2 Regulating monopoly networks: the use of price caps

The regulation of companies is undoubtedly not an easy task, and regulatory rules
normally involve the linking of a regulatory response to a standard of performance,
whether relating to price or service. The present paper is interested predominantly in
the service quality aspect, but of course, there is an obvious trade-off between the two,
where it is assumed traditionally in economic regulation that an improved standard of
service quality must come at the cost of a higher price to customers for delivering it.
This does itself conflict with the principles of benchmarking – that is, in the particular
context of quality management, to transfer practices which enable both improvements
in quality of output without increases (or with falling) cost levels (Crosby, 1980).
UK utilities are regulated by a price-capping formula RPI-X; this is different from
the standards US (and most other international) rate-of-return forms of regulation
where the regulator allows a rate to be retained by the company. Each UK utility has a
periodic price review, usually at five-yearly intervals. This review includes standards
of quality, delivery and specific customer service performance targets as part of the
regulatory process. The application RPI-X provides a restriction on the real price
increases (as the total value of RPI-X is the cap on prices and the determination of
the size of X is indicative of the level of management inefficiency – or, better put, the
potential increase in efficiency or other cost reductions); further, a change in the levels
of costs and revenue directly affects the level of profits, and the level of shareholder
gains. The retail price index is used rather than an industry-specific index as this
cannot be manipulated by the regulated company and therefore it gives customers
clearer and more predictable signals about real price levels (Armstrong et al., 1994).
It is also more relevant to consumers in general (as this is itself a consumer index).
The logic behind the RPI-X formula is that it gives companies incentives to deliver
services at a lower cost than that anticipated by the regulator where additional profits
may be retained until the next regulatory review of the cap. These savings can then be
passed on to consumers through lower prices or improved standards of service which
the regulator imposes in subsequent periods, or reinvested back into the network for
longer-term durability. On the assumption that this holds true, the RPI-X price-capping
mechanism provides strong incentives for improved efficiency for the ultimate benefit
of consumers. Determination of the value of X, and other requirements along with it, is
based on a continuous review of company ability to perform. Alternatively, if the
incentive is too strong, the companies may seek to reduce costs by degrading quality.
Equally important:
BIJ [. . .] the incentive power of price cap regulation comes not from the severity of the cap, but the
right of the company to any residual profit. A company which is maximising profits will seek
16,1 the same cost reductions to a level that maximises profit, regardless of the cap’s tightness [. . .]
Only if the cap is so tight as to make the company go out of business (which would violate the
regulators’ duties), or if the company is aiming at some “satisfactory” level of profits rather
than the maximum, does the tightness of the price cap affect cost cutting incentives (Markou
and Waddams Price, 1999, p. 396).
52
In essence, this is a failure of RPI-X, and for which more direct standards of service
quality may need to be in place additionally. There is a subtle irony (or even absurdity)
in the logic behind RPI-X: that is, the regulator is allowing the companies to charge a
lot more in the present time in the hope that they will use such profits to lower future
costs that can be shared with the consumer in the longer-term. This is a strange
surrogate of a competitive industry!

3.3 Regulating service quality and setting performance measures

Arguably, perhaps the RPI-X form of economic regulation has indirectly encouraged
companies to lower quality of the network, which has led to the direct need to
regulate quality standards. This is because RPI-X allows the company to retain profits
(to be reinvested back into the network) by being more cost-efficient and operating
within the maximum price permitted, so the obvious defect is the threat of the company
maximising short-term and shareholder gains with high profitability while
deteriorating the quality of service standards to reduce costs. However, quality is a
difficult matter to address, and to quantify, than is price. For example:
Regulators generally find it easier to regulate price than quality. Price has the great
advantage of being (in certain markets at least) both one-dimensional and objectively
measurable. Quality, on the other hand, is harder to pin down. It has many dimensions, some
of which typically rest upon subjective evaluations by the purchaser and consumer; and in
many cases the true quality of a product only comes to light some time after it has been
consumed. In some cases, it never comes to light (Baldwin and Cave, 1999, p. 250).
The definition of quality varies, depending upon the discipline within which it is being
defined: in the total quality management context, this is determined by the ultimate
customer (Pruett and Thomas, 1996; Witcher, 1995). This places a strong onus on
defining quality adequately if there is an explicit shift from price regulation to a focus
on quality, indicative by the increased legal power of consumer councils.
One way to explain the model of regulating quality, based on individual and overall
quality standards, is to assume the choice of tiered levels of service quality, requiring
compensation for those directly affected. In this way, compensation levels should be
equal to the claiming consumer over the probability of a claim made, although in
practice, this amount is estimated. Over time, the compensation levels have only
roughly increased in line with such type of calculation (Chau, 2002). Waddams Price
et al. (2002, 2008) find inconsistent views within and between regulators on regulating
service standards, and that the regulated companies are motivated by political factors
as well as economic ones (i.e. not just the financial rewards and penalties for their
quality targets). One obvious contradiction is that “OFGEM believes that it is
important to introduce guaranteed and overall standards of performance in respect of
certain non-contestable activities . . . ” (OFGEM, 2001d, p. 75), but the managers
expressed doubt about how the regulator had chosen standards with one suggesting
that the regulator’s philosophy was “to squeeze until you’ve got a problem but by the Benchmarking
time you realise you’ve got a problem it’s a long way past remedying very quickly . . . service quality
[and] the appropriate customer standards were below current standards” (Waddams
Price et al., 2002, p. 24). Equally, the negative views of the standards, such as
“constraints which aren’t always binding [because of] . . . gaming the system . . .
[despite] a lot of brainpower is put into optimising against the incentives scheme
because we can actually make more money” (Waddams Price et al., 2002, p. 24), raises 53
the possibility of optimal breach – a condition where deliberately not complying is
better than complying – and questions the effectiveness of regulating customer service
quality standards.
There can be two obvious approaches for setting standards:
(1) to set a penalty for each standard the company does not meet, which is most
effective if these penalties are compulsory and automatic (Waddams Price et al.,
2002); and
(2) to create an incentives scheme that ensures the standards are being maintained
(Bowdery, 1994).

Rovizzi and Thompson (1992) suggest four possible mechanisms for regulating
quality:
(1) the requirement to publish measures of quality;
(2) to include a measure of quality in the price-capping formula (RPI-X þ Q);
(3) to set up customer compensation schemes; and
(4) to specify minimum standards and back them with legal consequences.

Alternatively, an incremental improvement in service quality would mean that

intra-marginal consumers (those affected before the improvement) would still benefit
from the quality improvement (Helm and Yarrow, 1988). Even prior to any meaningful
quality standards were set, Helm and Yarrow had already recommended the need to
either:
[. . .] link allowable prices to indicators of service quality, or introduce more direct incentives
for improved quality of service by, for example, providing for individual redress for the
regulated firm when performance falls below some acceptable standard (Helm and Yarrow,
1988, p. xxi).
Ironically, the first two privatized utilities (telecommunications and gas) made no
provision for regulating service quality, which solely operated on standards of
voluntary bases (Graham, 2000). This is probably because there were few
well-established successful benchmarks on which to base at the time. Even the first
report of Office of Water Services (OFWAT, economic regulator of water and sewerage
industry) on customer service standards admitted in their first quality report that:
[. . .] the Levels of Service Indicators are not performance or efficiency measures in themselves
[. . .] [and] confidence in the information for comparative purposes will improve rapidly over
the next few years (OFWAT, 1990, pp. 1 and 5).
Despite the then expression of lack of confidence, OFWAT does take the matter of
reporting accurately seriously, as it was recently shown by huge fines potentially
BIJ imposed upon companies that misrepresent such data (BBC, 2008). It was not until the
16,1 enactment of the Competition and Service (Utilities) Act 1992 when regulators gained
general powers to regulate the quality of service standards (now consolidated by the
Utilities Act (2000) and the Water and Communications Act (2003)). In imposing
adequate levels of standards, the very difficult task of assessing the qualitative optimal
equilibrium between marginal benefits and marginal costs of providing a service
54 standard is required (Baldwin and Cave, 1999), and increasingly so, there has been the
recognition of “a tendency for the measurable to drive out the unmeasurable” (Baldwin
and Cave, 1999, p. 254, sic).
With these many problems in mind and the recognised dissatisfaction with the
performance measurement systems applied in the UK network industries by the
regulators (some) researchers and consumers (Office of Electricity Regulation (OFFER),
1999; OFGEM, 2001b; OFWAT, 2001), more composite mechanisms have been introduced
as incentive schemes. It would seem that although the set of performance measurement
(and management) literature in public and private organizations stands as a robust
standalone entity (Fitzgerald et al., 1991; Neely et al., 1997), particularly in applying a
financially-focused approach (Modell, 2004), there are shortfalls in its application in the
utility sectors (Shaoul, 1997). Regulating utilities with management incentives is far from
simple (Strasser and Kohler, 1989) and involves greater thought and planning than that
from the perspective of economic regulation alone (Chau and Witcher, 2005a).

3.4 Customer service standards

The electricity provided to households is the outcome of broadly four important
components:
(1) that of electricity generation;
(2) that of electricity supply;
(3) that of distributing it to households; and
(4) that of high-voltage transmission.
Historically, particularly at the time of privatization, these services were bundled
together. Since the opening up of the market to competition – such as in 1998 when
customers were given a choice of suppliers – and the separation of the businesses, the
energy regulator OFGEM – formerly OFFER – had set increasingly more stringent
targets on customer service standards.
The first set of published data on the quality of the (then known as) public
electricity suppliers (PESs) was in the 1991/1992 Report on Customer Service (OFFER,
1992) to “assess the quality of the service [customers] receive and to enable them to
compare it with the service provided by other electricity supply companies” (p. i).
These customer service standards were established by a regulatory framework
initiated by sections 39 and 40 of the Electricity Act 1989, and:
[. . .] one of the main purposes [. . .] is to set a common framework for customer service [. . .]
to ensure a minimum level of service for all customers and to encourage companies to aim for
higher levels of performance (OFFER, 1998, p. 63).
It was difficult to find adequate benchmarks at the time, except in similar sectors, but
this was also difficult as there was no obligation on any of the utilities to keep a record
or, let alone publish, their performance data.
 For electricity distribution, performance data are reported in the Report on Benchmarking
Distribution and Transmission System Performance (OFGEM, 2002). These supply service quality
and distribution standards formed the guaranteed and overall, standards of
performance scheme (GOSPs), which comprise two types of standards:
(1) guaranteed standards (GS); and
(2) overall standards (OS).
55
GSs set standard levels which must be met in each individual case, and in the event of
failing to reach the required level, the customer affected is entitled to a package of
compensation, upon request. OSs cover areas of service which are not appropriate
to give individual guarantees but where the customer should have the right to expect a
minimum level of service; no compensation is available to customers for these but the
company suffers negative reputational effects.
The key difference between the two types of performance standards is that GSs run
across all the companies; so for example, GS5 demands that companies give at least
five days’ notice for an interruption to supply, for which a compensation of £20 (rate in
2002) is imposed in the event of failure. OSs however are set for the specific company
depending on its own circumstances; so for example, the attainment level of OS5 (the
moving of a meter within 15 working days) for Manweb in 1992/1993 was 100 per cent
but only 95 per cent for Swalec, and in 1994/1995 was 95 and 90 per cent for the
respective companies, although all the targets were rather standardised by 1997/1998.
A detailed account of the evolution of these standards from privatization to 2001 is
given by Chau (2002) who finds that companies have gradually become better at
achieving these while the regulator is tightening the targets. But this is rather
nebulous, given the background of changing ways these standards are being classified,
defined and recorded, rendering it difficult for researchers, let alone customers and the
general lay public, to make meaningful comparisons. An example is that payments for
some standards have been made automatic (but not all) and so the overall number of
customer claims may fall while the overall amount of money paid in claims may be
higher, only further confused by increasing rates of pay per claim over time; for
instance, claims for “making and keeping appointments” (originally GS9 now GS8)
have become automatic while those of “notice of planned interruption of at least 2
working days” (originally GS5 now GS4) are payable only upon a manual claim.
This begs the question of how adequate these standards really are, and whether it is
time for radical changes to how these performance measures are defined, and if so, how
to benchmark these, given their complexity; the questions apply to both regulators as
policy-makers as well as companies who are players within this “regulatory game”
(Veljanovski, 1991). By around 1997, coinciding with the government green paper on
modernising utility regulation (DTI, 1998), the idea of establishing a new set of
composite performance measures arose; and in electricity distribution, this resulted in
formal discussions in December 1999 (OFGEM, 2001a) on the IIP.

4. OFGEM’s information and incentives project (IIP)

4.1 Origins of IIP
Introduced under the Utilities Act (2000), IIP became fully operational in April 2002.
It did not replace GOSPs; rather, it mainly established a framework with which to
“strengthen the incentives on the electricity distribution companies to deliver the
BIJ agreed quality of output and to value better changes in the quality of output” (OFGEM,
16,1 2001c, p. 1). The additional focus is an internal management one, whereby one aim is to
reduce uncertainty and transparency, which are characteristic of traditional
principal-agency problems (Jensen and Meckling, 1976) between regulator and
regulatee. Hence:
The [IIP] provides clarity to the companies on what they are expected to deliver. This reduces
56 uncertainty and increases transparency (OFGEM, 2001c, p. 8).
However, despite OFGEM’s consultation with various consumer groups (OFFER, 1999;
OFGEM, 2001b) for establishing a benchmark in quality, there is insufficient evidence
that IIP’s design had recognised key principles of service quality in the
marketing/management discipline, such as customer relationships (Parasuraman
et al., 1985, 1988) and technical/functional quality (how service is actually received –
Gronroos, 1983, 1990). OFGEM did note the importance of some criteria:
It is important that in future there is sufficient incentive on the companies to deliver [. . .] but the
incentives regime must meet certain criteria if it is to be effective [. . .] [I]t should be transparent,
fair and workable, and not create perverse incentives on companies [. . .] It would also be
advantageous if the additional mechanisms are not unduly complex (OFGEM, 1999).
Some time after, OFGEM did conduct a consumer survey on how well such standards
actually represented consumer favour (OFGEM, 2001b), and incidentally, there has
been much excitement and speculation as to how IIP would impact upon company
performance and its implications for management. For instance, the UK National Audit
Office had praised the scheme as “a promising development” (NAO, 2002, p. 33), and it
has been remarked by scholars that “the IIP [. . .] is likely to be the centre of regulatory
attention over the next few years” (Weyman-Jones, 2001, pp. 246-7). This view has
indeed materialised with surging commentary about it (Ajodhia and Hakvoort, 2005;
Crouch, 2006; Jamasb and Pollitt, 2007; Turvey, 2003; Williamson, 2001).

4.2 Composition and functioning of IIP

IIP comprises essentially two parts:
(1) the information; and
(2) the incentives aspects.

Hence the name. The information part of the scheme is ongoing but began a year in
advance of IIP becoming fully operational and the incentives aspect taking effect.
A greater emphasis has however been evident in literature on the latter than the former
(Green and Trotter, 2003; Friday et al., 2003) despite estimates of initial informational
errors being possible of up to 30 per cent (Giannakis et al., 2005). The project
anticipated improvement in the way information was presented to the regulator to
reduce asymmetry of information and regulatory risk (a potential principal-agency
issue), furthered by a strengthening of the incentives to achieve efficiency savings and
deliver agreed quality of output to customers. Indeed, incentives are difficult to provide
without information. The first year of the scheme focused primarily on creating the
quality of service information collected by the distribution companies, and secondarily
on defining outputs to be incentivised for the companies. Thereafter, the incentives
aspect of the scheme was implemented and took priority.
 The financially incentivised output measures include: the number of CIs; duration of Benchmarking
interruptions, measured as CMLs; and customer satisfaction. The IIP consists of a service quality
scheme that penalises companies at the maximum rate of 1 per cent of revenue in the
first year (amounting to about £2 million per company) in 2002/2003, and increasing to
2 per cent in the second and third years. The other side of this coin is a financial reward
for companies that exceed their specified targets for 2004/2005, based on their rate of
improvement in their performance to date. The third part of the incentives scheme 57
involves a way of rewarding companies that have achieved frontier performance (best
possible level of quality) by the next price control period.
In order to measure this “quality frontier”, a normalisation model is specified by
OFGEM as a framework for adjusting companies’ actual performance to account for
different network characteristics and customer density in the physical area in which
they serve. The final part of IIP is the assessment of the quality of telephone response.
The original set of GOSPs did not include a standard for telephone response, unlike one
which does exist in the water sector. Further, the urgency to develop one as part of
GOSPs was softened as IIP would instead bring into effect this standard. As it is
difficult to compare the quality of telephone response across industries, making it
difficult to establish a range of standards of telephone response, incentivisation under
the IIP scheme is therefore based on outperforming the average performer in the
industry. Hence, the companies are performance-ranked, and penalties apply to those
below the average performer and rewards to the above-average performer.
The companies that continue to either fall below or improve above average in the
following years are either penalised or rewarded, respectively, by an amount based on
an “incentive rate” which specifies the amount of revenue that a company either loses
or gains for each “unit” above or below the average performer (OFGEM, 2001c).
While GOSPs still function in parallel with the IIP, a few amendments have been
made to some of the OS standards of performance to match IIP’s rationale. Most
obvious are OS1a and OS1b, whereby a given percentage of customers must be
restored after an interruption within 3 and 18 h, respectively. A financial penalty which
is imposed under the Utilities Act (2000) for poor performance does not automatically
preclude the imposition of another financial penalty under the legislation for failing an
OS standard. The significance of the Utilities Act (2000) has therefore brought about
much interest (James et al., 1997, 2001), particularly the technical details of how exactly
IIP operates (for full technical particulars of IIP, see OFGEM, 2001c, and for a technical
discussion of their likely impact, see Curcic and Reid, 2003).

5. The regulation research project: implications of IIP

5.1 Rationale for the research
The two-year longitudinal research project explored the implications of regulation
policy incentives for strategic control in the management of UK regulated monopoly
network utilities (Chau, 2006; Chau and Witcher, 2005a). This involved understanding
how specific incidents of regulatory policy incentives, including those of IIP, affect the
organization-wide management of the strategy and daily activities in companies of
electricity distribution, gas transportation and water services; the findings reported in
this paper involves only the electricity distribution part of this overall project.
The principal contribution of the overall research project is the provision of an internal
management understanding of the company that complements existing and
BIJ longstanding views of institutional relationships; this better understanding would
16,1 provide to policy-makers a clearer view of managing constraints, and suggestions for
improved management practices to practitioners.
Understanding how regulation impacts upon the organization or how regulatory
incentives influence internal management is somewhat more intricate than
traditionally considered in managerial economics (Holmstrom and Milgrom, 1991),
58 and there are other strategic and performance management issues concerned (Witcher
and Chau, 2008); where a managerial change in regulated sectors is dynamic, changes
to governmental and regulatory policies may impact upon micro-organizational
practices unpredictably (Wilson and Jarzabkowski, 2004). The project was also novel in
that it utilised a rare research approach (longitudinal tracer studies) in the regulation
sector to explore issues inside the organization, treating it as a “black-box”, to
complement extant knowledge about the regulatory environment outside it.

5.2 Findings from the regulation project

A number of issues emerged from the regulation project were considered as significant
internal organizational implications of the IIP coming into effect. The data analysis
indicated that five issues seem most prominent in the investigation (where, in
methodological terms, these issues corresponded with points of data analysis where
the sufficiency of abstraction proved highest).
5.2.1 Company profile and monopoly network status. The research was conducted in
real time through an interesting phase of major organizational change and industrial
consolidation. ElectriCo, at the time of the research’s commencement, was part of a
large regional PES which was sold off to another whose responsibility of IIP was
contracted out to a third-party company. The company then merged with yet another
PES of similar size, whereby the contractor company provided the forefront IIP
services for the new company under three separate distribution licences. This was only
to be superseded in the fall of 2003 by the takeover of another utility giant. The rapid,
yet significant, organizational changes within the reasonably small timeframe were
regarded by ElectriCo as a strategic response to regulatory imposition, including
the specific constraints of IIP. The literature on the link between organization structure
(Dalton et al., 1980) or change programmes (Dean et al., 1999) and performance seems to
suggest the viability of this view.
However, the obvious constraint is the monopolistic character of the company. If the
purpose of IIP is to help provide a surrogate for a competitive environment, this has not
worked, as the response of the ElectriCo has been to strengthen its monopoly position
from being a local distribution network to a conglomerate of networks. A regulation
manager of ElectriCo explained how the regulator falls within the company’s list of
major risks and constraints, and commented:
[. . .] in the absence of the regulator, we’d raise our prices, cut our costs [. . .] and behave like
monopolists [. . .] we’d charge with high profits to our shareholders – that’s always going to
be our ultimate driver [. . .] but the regulator will always prevent us from doing so, but we’ll
always find some way.
This suggests that one purpose of regulation is in fact not well received by the
company.
ElectriCo has tried out (or “tested”) a number of business models before settling to
its current; this is consistent with literature that argues that the testing of a number of
strategies (organizational structures), especially for regulated monopolies, at a Benchmarking
macro-level is necessary before settling down to an agreed way forward (Dobbin and
Dowd, 1997) for a better overall compliance. IIP has impacted upon the
service quality
micro-operational level to quite a surprisingly small extent, given the comparative
impact on the higher-level strategic decisions. At the micro-organizational
decision-making level, the research identifies that a useful strategy may be optimal
breach – that is, the deliberate choice of non-compliance of regulatory requirements 59
where the penalties are comparatively smaller than the potential gains. An ElectriCo
employee explains: “IIP is important, but success should be determined by much
more . . . we might be willing to sacrifice our IIP success if there are greater goals
elsewhere”. So at the local level, IIP has not significantly altered the mindset of
optimising alternative company objectives for financial gains.
5.2.2 Internal confusion. An immediate consequence of major organizational
restructuration was the confusion (of work responsibilities as well as strategic direction of
the company) experienced by personnel within the different original units of ElectriCo.
The extant literature of the economics discipline, on which regulation is predominantly
based, has rarely considered internal management dynamics as a consequence (for
example, such as Crew and Kleindorfer, 1996; Dnes et al., 1998). The problems identified in
the research concern the control over activities and clarity of individuals’ current/new job
specifications. For example, a general manager commented:
[. . .] we no longer have teeth on the contract [the former agreement] – the uncertainty and
change we are going through are causing a bit of confusion as to how much we do and where
the line is between what we do about performance and how far we go about influencing that
performance.
It seems that these high order strategic approaches cause these interim complications
but eventually they level out and become resolved slowly. Three months after the
comment was made, the same manager commented: “there’s [now] a bit more sense of
belonging to the team, and hopefully the customer will pick up on that, and more a
sense of responsibility about how we treat our customer and how we look after our
network”. In essence, the IIP has succeeded in providing a potential for improving the
network (as the consolidated ElectriCo group owns and operates the distribution
network assets, providing potential scale economies), but has failed to address the
management complications in the transitional interim.
5.2.3 Building IIP into the company performance management system. The customer
service standards implemented immediately following privatization of the electricity
industry had focused more on trying to measure company performance based on
quality measures rather than on managing it (Chau, 2002) – hence, it has been more of
a performance measurement system rather than a performance management system.
Economic regulation has tended to specify outputs (the quality targets) rather than the
processes for delivering them; IIP is probably the best attempt so far to get a tighter
grip on a company’s management system. The efficient integration of objectives into
the company’s management system normally requires the satisfaction of the SMART
criteria, argue Cross and Lynch (1988) – that is, they must be simple/specific,
measurable, accurate/agreed-upon, reliable/realistic and timely. Given that these
regulatory objectives are already specified, the question is how well they integrate into
the company’s performance management system to have best effect in maintaining
SMART conditions.
BIJ It seems the easiest way to do this is to make the company’s already existing key
performance indicators (KPIs) directly the IIP targets, for convenience, so that the KPIs
16,1 can frequently inform the company of its IIP progress. This is because the initial KPIs
were designed to already have the benefit of being SMART which help to provide
timely control over necessary changes. A manager explained that “some of the KPIs
are lined up with the regulatory targets . . . [and they] are being refined and redefined
60 and being rebased on the IIP process . . . and in some cases they are IIP targets”.
This alone is insufficient or perhaps only half the trick: the other half is
communicating IIP across the organization so that everyone in the company can work
towards a common goal of which the regulatory targets are a part (Witcher and Chau,
2007). This is an important principle of performance management (Kaplan and Norton,
1996). The need to manage multiple objectives has been recognised long ago, even
since Drucker (1955) who advocated the term “management-by-objectives”, meaning
the management of organizational activities based on specified objectives. But for
ElectriCo, this was rather difficult, given the rapid changes in its organizational
structure, reflecting the need to additionally manage multiple local strategies. At one
point of the organizational transformation, ElectriCo:
[. . .] did it [communicate IIP issues to the rest of the organization] in the form of a game where
[ElectriCo] replicated the Monopoly Board and gave each street an IIP standard [. . .] [and] as
it’s not the sexiest subject of all, you need to get a bit more involved (a general manager,
ElectriCo).
IIP’s impact upon management comprised redefining constantly ElectriCo’s overall
objectives against the background of a higher-level strategic move of organizational
restructuration.
5.2.4 Actual improvements in service quality? The question of whether actual
improvements in service quality were really being made was asked with the GOSPs
system just before the introduction of IIP. If IIP is just a reinforcing infrastructure for
GOSPs targets, then what additional improvements can be expected? A regulation
manager of ElectriCo commented, “RPI-X is the big grand-daddy of all incentive
mechanisms, really, and IIP is just a kind of second-order incentive when compared
with the general incentives created by the [periodic] price review [assessment]”.
It is unclear whether IIP has been successful in this respect – that is, whether the
effect of IIP has been positive because it has strengthened the RPI-X framework, or IIP
has failed because ElectriCo’s response to regulatory impact is really to RPI-X and not
to IIP. As the present paper reports findings from immediately after IIP’s
implementation in ElectriCo, it is too early to judge whether there has been
significant improvements in distribution performance, particularly where the mass
organizational change has blurred the understanding of it somewhat.
But perhaps the interesting thing for discussion here is not the achievement of the
regulatory objectives per se, but rather whether there is natural alignment of the
regulatory and organizational objectives and a propinquity relationship between them.
Much company effort and resources may be saved where this alignment is sound
(Kaplan and Norton, 1996). The research identifies that some of the IIP targets were
either transformed into an existing organizational objective or incorporated into a
subset of an organizational objective. The ease at which this was done was really due
to the alignment in the purpose of the objectives, and both of the regulatory imposed
and already existing organizational ones are for the good of the company in terms of
the long-term durability of the network (for a suggestion, see Witcher et al., 2007). So, Benchmarking
why then must economic regulators be given powers to impose standards on
companies which are already good for them? The answer may be one of control: if
service quality
regulation can affect “the process by which managers influence other members of the
organization to implement the organization’s strategies” (Anthony and Govindarajan,
2001, p. 6), rather than simply affect the company’s “planning” (Anthony, 1965)
process, which does not necessarily ensure a consistency between the regulatory and 61
ordinary organizational objectives, then it has succeeded in making a significant
impact and fulfilled its role. In other words, in this way, not only may improvements be
made more adequately through a closer alignment, the purpose of regulation has also
been satisfied.
5.2.5 An improved way of managing. An internal management impact concerns the
possibility of improved ways of managing for results – that is, the complex processes
for delivering the required performance targets (Chau, 2008; Chau and Witcher, 2008).
The water and gas sectors have attempted to benchmark the early lessons from IIP –
see OFWAT’s overall, performance assessment scheme (OPA) equivalent (OFWAT,
2002), and OFGEM (2005b, 2006) for gas distribution, for example. Similarly, OFGEM
had taken preliminary expert feedback from academics, practitioners and consultants
to form improvements for the next price control review; see OFGEM (2003) for details,
including the present author’s comments as part of this consultation.
A number of different performance management approaches were being used in the
separate parts of ElectriCo before the merger of 2003, but the most promising was
considered that of the balanced scorecard (Kaplan and Norton, 1996) with which
multiple objectives can be managed organization-wide, mainly in the areas of finance,
customers, business processes and learning and growth, to encourage individual
participation for the achievement of the central vision and strategy. The present
research followed the stages of how the company had built an entirely new balanced
scorecard for its networks branch within ElectriCo. In ElectriCo, a number of local
operational scorecards exist that feed into a higher-order scorecard containing
strategic ambitions – the networks branch scorecard is directly concerned with
managing IIP and service standards. As a general manager explains:
[. . .] there will be a team [the networks branch] looking at chunks of work, and it will be easier
to provide the teams than it is to go in and understand what they’re doing and drill down in
their processes as well as the things above and below in other areas.
The key impact of IIP is in how the Kaplan and Norton approach was augmented for
issues directly relating to it. In essence, ElectriCo’s balanced scorecard comprises four
perspectives of:
(1) financial;
(2) people;
(3) processes; and
(4) customer.
Each of these perspectives contains either direct service standards or targets which
somehow relate to an IIP target. For example, an objective of the customer perspective
of the balanced scorecard is to “improve quality of supply”, measured in terms of CI
and CML definitions. Equally, new within the management of the company is
BIJ “what [ElectriCo] has developed called ‘tree management’”, which fits within the
16,1 process perspective under the objective of “improve contractor relationships and
performance” and measured by “tree-cutting against plan”. It is explained, “we can go
and measure the exact amount of cut made off a tree, but that wouldn’t tell us a man
can clear ten trees a day . . . but putting in the balanced scorecard can help us monitor
and manage this process” (general manager). New operational processes were therefore
62 devised to enable the better management of IIP requirements, and were identified as
being a benefit from adopting use of the balanced scorecard.
But how significant a role has regulation played in ElectriCo’s decision to employ
the balanced scorecard approach? A general manager suggested “the scorecard is a
very good . . . and powerful tool, and if [ElectriCo] were to move to any other process,
probably most of the fundamentals of a scorecard would still be there”. Equally, should
ElectriCo not be a regulated monopoly, a balanced scorecard may still be used for
general management, given about 62 per cent of world-wide companies have already
adopted it (Rigby, 2003). The ElectriCo respondents showed awareness of the
constraints a regulated monopoly has and that the scope of its strategic options
available is limited, giving such examples as the inability to market a homogenous a
product (electricity distribution) in a variety of colours. The electricity supply market
was only opened up to competition in 1998 so that a more competitive environment
could be provided as much as possible, where features such as price and service quality
would characterise the regional monopoly (and the product/service). ElectriCo had
belonged to a heritage of the supply business before focusing solely on distribution at
one point. This raises questions as to whether regulation had delayed a company’s
adoption of a balanced scorecard approach, since it has been over a decade since
its first appearance in Kaplan and Norton’s (1992) seminal paper, and two decades
since the first scorecard approach was used in Analog Devices in 1987 (Schneiderman,
1999).

6. Conclusions
6.1 Contribution and limitations
The paper has reviewed the importance of regulating service quality in monopoly
network utilities and explained the performance measures used in electricity
distribution prior to and after IIP’s introduction, paying particular attention to how it
has benchmarked from other industries. It has contributed to extant literature by
discussing service quality and IIP’s consequences for internal organizational
management. It has not however provided authoritative answers to any
longstanding questions on how exactly to manage to deliver higher levels of service
quality, so some scope remains for future research. The regulation project has captured
an interesting phase of major organizational change in ElectriCo; during this time,
there were also other economic issues of importance recognised in the research, but
were excluded in this paper to avoid over-complication. These included: the winter
storms of 2003, verdict of the Larkhall explosion, liquidation of Railtrack (and fading
away of the Railtrack model of management), impact of the European Working Times
Directive, UK pensions crisis, and the general changing face of UK governmental
control – all of which provided valuable lessons for utility management, and the best
practices available for benchmarking. The case of UK distribution networks only was
considered, and no international scope for comparison was afforded.
6.2 Remarks on service standards prior to IIP Benchmarking
The findings from some early research (Chau, 2002; Waddams Price et al., 2002) and service quality
the regulation research project (Chau, 2006; Chau and Witcher, 2005a) seem to suggest
that performance levels of service quality are improving over time. The reason for this
may not be a direct outcome of regulatory impact but perhaps to do with other issues,
such as improving technology over time. This is probably not the most critical concern:
what is of concern is the degree to which the distribution companies recognise the 63
importance of performance targets as a safety and long-term “good” for the company,
and do not regard them as part of an overall regulatory game in which the rules are
now only too well understood. The purpose of IIP was not to reset the rules of this
potential game; it was to better reinforce the incentives for more efficient internal
management to pay greater attention to improved outputs of customer service quality.
In this way, as there is a mutual gain for both regulator and company, there is an
alignment of regulator and company purposes. This view is perhaps supported by the
Utilities Act (2000)’s reversal of primary and secondary duties of the regulator, by
setting a primary responsibility “to protect the interests of consumers” by improved
network performance and longer-term durability, and only then, as a secondary
consideration, to ensure that “licence holders are able to finance their activities” (pt II,
Sections 3A.1 and 3A.2).

6.3 Remarks on the impact of IIP

The case of ElectriCo is indeed only one (three by the end of the research) of 14 separate
distribution licences, but should be regarded as representative of the likely industry
response, given the size of the electricity distribution industry it covers and how other
distribution companies have referred to ElectriCo’s recent experience from which to
take lessons and benchmark practice in each of the five ways identified in the research
above. Overall, the impact of IIP on the management of ElectriCo can be regarded as
significant, particularly in the case of major organizational restructuration as well
as how IIP was built into the management processes of the company. But if
“the regulator’s job is dependent upon the continued requirement for a regulator and
the success of the regulatory process” (Crowther et al., 2001, p. 236), then IIP is really
just a convenient by-product of the measures already in place.

6.4 Lessons for benchmarking in electricity distribution

While there has been a marked need to address the pertinence of improved service
quality trends in the electricity sector, “it is possibly not too surprising that the results
achieved by the privatized industries and the regulatory process itself have been
defended by the regulators” (Crowther et al., 2001, p. 236). A regulatory manager of
ElectriCo commented:
IIP [. . .] has definitely stimulated a lot of interest [. . .] certainly on the incentives side of
things. For us, it needs to sink in; it’s a bit like an oil-tanker – you can’t really turn it around
in ten minutes. For OFGEM, I don’t think there’s enough juice left in them to stimulate much
more imagination!
Only time can tell what future changes will be to how service quality in UK electricity
distribution networks will be regulated. For now, perhaps IIP as “the devil you know”
is sound enough, as it is being reviewed (OFGEM, 2005a) before being implemented in
the UK gas sectors (for a review, see, OFGEM, 2005b, 2006).
BIJ And if IIP is really just a reinforcing framework for RPI-X (the overall price
16,1 regulation mechanism), then the onus is on the adequacy of RPI-X. It is questionable
therefore how adequate this really is, despite its longstanding existence, given that
the retail price index is based on a basket of weighted general consumer items,
when the world is currently experiencing surging prices in fuel and other household
consumer products and services. Going back to the renowned point of Littlechild (1983,
64 p. 7) that regulation is only “holding the fort until competition arrives”, perhaps the
only best solution is to wait for this desideratum: the lessons to be gleaned from the
electricity distribution experience, from the present research, are as yet too unclear to
qualify as perfectly useful practices for general benchmarking.

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Further reading
Evans, J.R. (2007), “Impacts of information management on business performance”,
Benchmarking: An International Journal, Vol. 14 No. 4, pp. 517-33.

About the author

Vinh Sum Chau is Lecturer in Strategic Management at the Norwich Business School, University
of East Anglia, and faculty member of the UK ESRC Centre for Competition Policy. He also holds
the Chair of the British Academy of Management’s special interest group and annual conference
track on Performance Management. He has taught and published widely in the areas of
performance management, strategy implementation, service quality and customer satisfaction.
Vinh Sum Chau can be contacted at: v.chau@uea.ac.uk

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