As music legend Kate Bush was due to go on stage at London’s Hammersmith Apollo at 7pm on a recent Friday night, the lights went out. The power failure could have meant sending home 3,000 frustrated fans – but a UK Power Networks engineer, in the area having finished his shift, took it upon himself to hot-foot down to the theatre with a back-up generator so the show could go on.
Basil Scarsella tells Utility Week the story with a smile. It makes a pleasant change from tales of storms, select committees and exploding pavements – the usual lot of the chief executive of UK Power Networks (UKPN), one of the country’s largest distribution network operators, serving more than eight million customers, including those in the London region. Indeed, he’s had a tough year, with the fallout from the Christmas storms hitting UKPN particularly hard, swiftly followed by the select committee inquiry on costs, and this summer the news that Ofgem was seeking to slice 9 per cent, or £600 million, from its business plan for the next eight years.
Despite these trials, Scarsella’s down-to-earth good humour is in evidence as he outlines his pride in the business’s turnaround, his concerns over the regulator’s draft determinations and his views on the changing role of networks.
It’s almost four years to the day since Scarsella successfully completed the bid for UK Power Networks, which he led on behalf of Hong Kong investor Cheung Kong Infrastructure (CKI; also the owner of Northumbrian Water). Italy-born Australian Scarsella had a history of working for the group as chief executive of ETSA Utilities (now South Australia Power Network). In 2009, when CKI bought UK assets, he moved to the UK as chief executive of Northern Gas Networks, during which time he also advised the company on its acquisitions.
“I led the bidding process, and together with advisers, we came up with the price which, through proper governance, the owners paid,” he says. “But then I was asked to go and run it and deliver on those assumptions, which tends to focus the mind!”
By anyone’s standards, it has been a success. Scarsella is widely credited with having turned around the business. He takes a quiet pride in the achievement and particularly in his workforce: “We took over a business that, to be fair and without being critical of the past, wasn’t that well regarded in the market and the performance wasn’t as good as it could have been… We’re now seen as one of the most reliable networks in the UK.”
UKPN has in effect begun the transition from a traditional engineering business to one focused on its customers as well as its assets. How has Scarsella achieved this?
“We’ve changed the culture of the business to ensure that employees are focused on the core responsibility of UKPN. Putting it simply, that is to keep the lights on and when the lights go out, to restore supply safely but as quickly as possible.”
He makes it sound easy, but in an organisation where the “40-plus club” (those who have been in the business for more than four decades) numbers in excess of 700, culture change is anything but.
“How do you go about changing the culture? By first establishing a clear vision for the organisation, communicating that vision right across all areas of the organisation to all employees in a very clear way, and then setting targets and clear accountability for the achievement of those targets that are related to the vision. I’m delighted to say that in all areas the employees have delivered to that challenge. Four years ago, the workforce had doubts whether the demands and the vision could be achieved, but those doubts quickly dissipated within 12 months because of the improvements that employees were able to deliver.”
It’s not all been good news, however. 2014 began in crushing form with UKPN and SSE the worst hit networks during the Christmas storms. Some 20,000 UKPN customers were left without power on Christmas Day. There was a media outcry, inflamed when Scarsella made some well-meaning comments with characteristic straightforwardness to the Mail on Sunday to the effect that, it being Christmas, many staff were on leave, and “could and should have responded to it better”.
The resulting coverage focused heavily on Scarsella in personal terms, and UKPN, as well as the rest of the industry, took a battering at the subsequent select committee hearing. Looking back, does Scarsella think it was unfair?
“No, I don’t think it was unfair. As I said at the time, the storm needs to be seen in the right context. There was the worst weather event for probably a decade or more. UKPN, together with the Scottish network, was the worst hit. Our employees, given the time of year, responded brilliantly, but unfortunately the event occurred on Christmas Eve and we had 20,000 customers off over Christmas, and again I apologise for the disruption or inconvenience caused by that. The reality is, if you’ve got 20,000 customers off over Christmas, then you expect to be made accountable, and we were made accountable.”
If there was a similar storm this Christmas, what would happen? “If there’s a storm at Christmas to the same extent, then clearly it’s very likely that a significant number of customers will lose their power because a storm generally results in damage to our power lines. But I expect we will respond even better than we responded last Christmas, because you always learn from events and the event of last Christmas was the worst event that we had in ten years.”
He looks up with a smile: “Having said that, I hope it doesn’t happen on Christmas Day!”
While the storms episode, and the coverage of it, must have been painful, Scarsella is too much of a pro to be bitter – and he seems genuinely to believe such coverage comes with the territory. What, then, of battles with the regulator, whose recent draft determinations for the first cycle of the new RIIO pricing framework came as a nasty surprise for distribution network operators (DNOs)? Ofgem is seeking to slice £1.4 billion from business plans across the industry, with UKPN the worst affected at £600 million – nearly 9 per cent of its planned expenditure.
Let’s talk about RIIO. He brightens. “The World Cup?” he asks with mock hopefulness (Scarsella has been a football pro, chairman of Soccer Australia and executive member of Fifa in between running utilities). No, not that Rio – the other one.
“Ah – I thought so.” He settles down to business: “It’s disappointing when I look at the changes Ofgem has made in relation to real price effects and also the smart grid benefits. It’s even more disappointing on real price effects when you consider that we operate in a region that is the south of England and London, where everybody would agree that costs in this part of the world increase at a rate that is always higher than the average national inflation rate.
“Having said that, we are working co-operatively with Ofgem to try to address what I do believe are the changes that may not have been right.”
Scarsella is hopeful of a constructive agreement with Ofgem on real price effects, which set the expected change in the prices of inputs that DNOs purchase relative to economy-wide inflation, at its final determinations in November.
More worryingly, he warns that the high level of savings Ofgem is seeking to claw back on smart grid innovations could discourage networks from innovation. “The industry, with the help of the Low Carbon Network Fund, has invested £400-500 million over the period , but Ofgem is saying the benefit to consumers over the next eight years on an industry basis is something like £900 million. Now, that’s an excellent rate of return for an R&D-type project – in order for the DNOs to benefit they have actually got to deliver benefits from innovation over and above the £900 million. A more equitable outcome would have been for those benefits to be shared between consumers and DNOs.”
Scarsella is more sanguine on the extra savings Ofgem is seeking on the smart meter rollout as part of the overall smart grid savings. Taking a moment to reiterate his support for the rollout, despite some reservations shared by the rest of the network industry on its supplier-led model, he says: “When I looked at the deliverability of the benefits of smart meters from a DNO perspective, it will be a challenge, but I think they will be achievable.”
Smart meters will be one part of a much wider change in energy consumption that will inevitably see the role of the networks change. “I think it will be a positive change. Today when a customer has their power cut off for whatever reason, we generally wait for the customer to call us to tell us that their power is off. With smart meters, we will know as soon as the power goes off, therefore we will be able to respond a lot more quickly than we do today and that will be for the benefit of consumers. There are big challenges for the DNOs, though.”
With the increase in distributed generation and the emergence of new business models such as community power, some experts are warning that the traditional distributor model is doomed. Does Scarsella think the networks are agile enough to respond?
“They have been able to respond to all sorts of changing demands over the past 30 to 40 years and will be able to respond to the changes that are occurring today.”
Or, to put it another way, as Scarsella, Kate Bush and the pros at UKPN all know: the show must go on.