In recent years, we have seen an increase in claims across Australia made by electricity distributors for financial loss resulting from third-party damage to their infrastructure. The most significant part of these losses commonly relates to a regulatory scheme known as the Service Target Performance Incentive Scheme (STPIS), administered by the Australian Energy Regulator (AER).
What is the STPIS?
The STPIS acts as a mechanism to incentivise electricity distributors in Australia to enhance their service reliability. The scheme establishes performance benchmarks that measure the frequency and duration of power outages experienced by customers. Distributors which outperform these benchmarks receive additional revenue under the scheme, while those that underperform face penalties, in accordance with a predetermined formula.
Benchmarking and Regulatory Control Periods (RCP)
A key aspect of the STPIS is the interrelationship between current and future performance.
The STPIS operates within Regulatory Control Periods (RCPs), which span five years each. If a distributor fails to meet its performance benchmarks during the current RCP, it faces penalties under the STPIS. However, the benchmarks for the subsequent RCP are based on the distributor's actual performance during the previous RCP.
This means that a distributor which is penalised for having a high level of outages during the current RCP will have easier-to-achieve benchmarks in the next RCP. For example, say a distributor had a target of 100 minutes of outages per customer for its current RCP. It was on target to achieve the 100-minute benchmark, but damage caused by a third party results in it achieving 105 minutes per customer instead.
During the next RCP, its target would be set at 105 minutes/customer rather than 100. If it then achieved 102 minutes of outages/customer during the next RCP, it would receive bonus revenue under the STPIS (since 102 minutes is under the revised target of 105 minutes), whereas but for the third-party damage, it would have been penalised for being 2 minutes above its original target of 100 minutes.
STPIS claims arise when a third party causes damage to infrastructure owned by a distributor, such as power lines or substations, causing an outage. The outage causes the distributor to perform worse relative to their STPIS benchmarks than it otherwise would have, resulting in a penalty (or reduced revenue) under the scheme.
However, the underperformance caused by the outage in the current RCP will also result in easier-to-achieve benchmarks in the next RCP, as explained above. Consequently, the distributor can expect to receive higher revenue in the next RCP as a result of these more attainable targets.
In our experience, a loss during the current RCP is generally identified in the STPIS claims made by distributors, however the benefit in future RCPs is almost never acknowledged. By not offsetting this future benefit against losses in the current RCP, the STPIS claims submitted by distributors are generally materially overstated.
Adjustment of claims
The STPIS is a complex scheme, and losses are calculated based on complex models which rely on a large number of inputs, some of which vary significantly from year-to-year. In addition to ensuring we take into account any future benefits to the distributor in our assessment of the loss, it is common to find other issues with the inputs used within the claim models. An example of a frequently issue relates to liability on these claims, which require scrutiny of the circumstances of the alleged incidents to identify whether other parties may bear some of the responsibility for the damage. This can result in appropriate adjustments being made in respect of liability.
In our experience, a proper review of STPIS claims by appropriate experts, including forensic accountants and liability adjusters with experience in these types of claims, can result in significant reductions to the claim by the time settlement is achieved.