National Grid transforms revenue protection and regulatory compliance

Automating sophisticated business analytics to eliminate error and provide near-real-time insight

Published on 19-Nov-2013

"IBM Global Business Services demonstrated its ability to provide a business-focused solution within very tight timescales and with shifting criteria. The IBM team integrated data from multiple sources, proved that the solution answered the business case, and enables National Grid to meet its regulatory and business objectives." - Steve Pollard, Information Management Team Manager, National Grid

Customer:
National Grid

Industry:
Energy & Utilities

Deployment country:
United Kingdom

Solution:
Automation, Data Warehouse, Transforming Business

IBM Business Partner:
SAP

Overview

National Grid is one of the world’s largest shareholder-owned utilities focused on transmission and distribution activities in electricity and gas in both the United Kingdom and the United States. The company invests more than £2bn in the UK and nearly $2bn in the US in its networks, supporting tens of thousands of overhead and underground electricity lines, gas pipes and storage facilities.

Business need:
Following the introduction of a new regulatory construct called Uncertainty Mechanisms, National Grid required new, timely insight and reporting processes, designed to protect revenue.

Solution:
Created, piloted and implemented an automated reporting solution with assistance from IBM® Global Business Services®, providing near-real-time business dashboards, and ensuring regulatory compliance.

Benefits:
National Grid is able to identify opportunities to engage with the regulator, Ofgem, and to understand how the outputs it delivers impact National Grid’s revenue allowances, and protect revenues.

Case Study

In regulated market sectors such as utilities, how do you meet and exceed your targets if executive reports arrive too late to impact your corporate actions? And when the framework with the regulator changes, how do you plan for unknown requirements and still come out ahead?

For the electricity transmission side of its business, National Grid designed an automated reporting solution that delivers overnight updates on business performance. With help from IBM Global Business Services, the solution was ready for use just four months after the regulator published the definitive set of business rules.

The solution generates a daily dashboard that analyses and crystallizes key information from a wide range of financial, asset and related data sources. For these business rules, managers are able to see, in near-real-time, exactly how the company is performing against a new part of its regulatory contract, with full visibility of key trigger points. This helps to highlight opportunities to re-open funding conversations with the sector regulator, and gives the ability to see how automatic mechanisms impact revenue allowances.

Highlighting the challenges of uncertainty
National Grid is one of the world’s largest shareholder-owned utilities focused on transmission and distribution activities in electricity and gas in both the United Kingdom and the United States. The company invests more than £2bn in the UK and nearly $2bn in the US in its networks, supporting tens of thousands of overhead and underground electricity lines, gas pipes and storage facilities.

The Office of Gas and Electricity Markets (Ofgem) regulates the sector in the UK. Periodically, Ofgem conducts regulatory reviews, which culminate in new arrangements under a framework known as Revenue, Innovation, Incentives and Outputs (RIIO). These arrangements regulate the utility companies’ operations in many areas, such as detailed capital expenditure plans.

A new part of these arrangements is a regulatory construct called ‘Uncertainty Mechanisms’ that is designed to provide an agreed method to account for the unknown future. For example, where there is fluctuation in terms of MW of generation connected, an Uncertainty Mechanism takes account of any under- or over-shoot in the calculations.

Steve Pollard, Information Management Team Manager at National Grid, explains, “Uncertainty Mechanisms are an entirely new feature of the regulatory environment. Because the Uncertainty Mechanisms change the operation and calculations inside the RIIO framework that governs revenue allowances, they are mission-critical for National Grid, and it was essential to understand them correctly.”

Solving the challenges of regulation
In a hugely complex business with a detailed and comprehensive regulatory regime, it is essential to understand exactly how the company is performing. Revenue depends on meeting the regulator’s innovation requirements and incentive funding may be on offer – or if targets are missed, fines may be imposed.

The arrival of a new regulatory regime, spanning eight years from April 2013, prompted National Grid to ensure that it had reporting solutions available to monitor the new elements governing its RIIO performance. There were no existing systems and processes in place to handle these new regulatory requirements, which in many cases were simply too complex to process within the time available. Without timely and accurate information, the company might not have been aware of the financial implication of the relevant Uncertainty Mechanism.

Steve Pollard adds, “For the 2013-2021 period, Ofgem confirmed the regulations in mid-December 2012, and they came into effect from 1 April 2013. For National Grid this opened a four-month window to digest and understand the mission-critical Uncertainty Mechanisms, build the automated solution, and commission it into production. We wrote an investment paper describing the business case for building such a solution; given the time available, could we do it?”

Automating, streamlining and accelerating reporting
Because the regulatory review periods are known well in advance, National Grid was able to start work in the summer of 2012 – with the disadvantage that the precise regulatory regime and Uncertainty Mechanisms would not be finalised until December that year.

Steve Pollard explains, “The company engaged IBM Global Business Services to review what was possible, prototype the system design and processes, identify the necessary data sources, and plan for implementation. National Grid selected IBM for its expertise in the sector, knowledge of the regulatory environment, and its ability to understand the analytically complex Uncertainty Mechanisms. Creating the solution was essentially a business challenge, enabled by advanced algorithms running in business analytics software.”

IBM worked closely with National Grid, fully embedded with the company’s business teams, and prototyped the solution based on Ofgem’s draft regulations. The design incorporated the ability to adjust the model when the regulations and the critical Uncertainty Mechanisms were confirmed, and only at that point would software code be finalised and deployed. The implementation was scheduled for the four months between Ofgem’s decision and the April start date.

Confirming by prototype that the solution is possible
The new solution, based on SAP BusinessObjects software, extracts data from a wide range of sources, including Oracle applications and databases, and Ellipse, an asset management solution. The prototyping stage enabled IBM to test and validate data, and create the appropriate extract, transform and load routines that would allow the process to run automatically once in production.

Additionally, the prototype tested the operation of the draft Uncertainty Mechanisms, by processing genuine data and examining the results. National Grid was able to see the solution in action, confirm the results, and establish the potential for regulatory compliance and revenue protection.

Steve Pollard remarks, “IBM Global Business Services demonstrated its ability to provide a business-focused solution within very tight timescales and with shifting criteria. The IBM team integrated data from multiple sources, proved that the solution answered the business case, and enables National Grid to meet its regulatory and business objectives.”

Delivering on the promises of technology
The solution was commissioned into production at the start of the April 2013 regulatory period The solution enables daily visibility of the impacts of the Uncertainty Mechanisms on baseline revenue allowances, and enhanced business control and monitoring of committed and planned expenditure.

Most importantly, National Grid now has near-real-time reporting of how it is performing against this part of its regulatory contract in order to give the company the best opportunity to outperform it.

Additionally, the detailed, timely reporting enables future visibility of whether agreed trigger points have been reached for applicable Uncertainty Mechanisms, which allows National Grid management to identify opportunities to engage with the regulator to re-open funding negotiations where appropriate.

For more information
To learn more about IBM services and solutions, contact your IBM sales representative or IBM Business Partner, or visit us at: ibm.com/gbs

Products and services used

IBM products and services that were used in this case study.

Service:
GBS Strategy and Change: Business Strategy, GBS Strategy and Change: Operations Strategy, IBM-SAP Alliance, IBM Global Business Services

Legal Information

© Copyright IBM Corporation 2013. IBM United Kingdom Limited. PO Box 41. North Harbour. Portsmouth. Hampshire. PO6 3AU. Produced in the United Kingdom. November 2013. IBM, the IBM logo, ibm.com, and Global Business Services are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might be trademarks of IBM or other companies. A current list of IBM trademarks is available on the web at: www.ibm.com/legal/copytrade.shtml. This document is current as of the initial date of publication and may be changed by IBM at any time. Not all offerings are available in every country in which IBM operates. The client examples cited are presented for illustrative purposes only. Actual performance results may vary depending on specific configurations and operating conditions. THE INFORMATION IN THIS DOCUMENT IS PROVIDED “AS IS” WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT ANY WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND ANY WARRANTY OR CONDITION OF NON-INFRINGEMENT. IBM products are warranted according to the terms and conditions of the agreements under which they are provided. The client is responsible for ensuring compliance with laws and regulations applicable to it. IBM does not provide legal advice or represent or warrant that its services or products will ensure that the client is in compliance with any law or regulation.