SA Power Networks. Independent analysis of arrangements between SA Power Networks and CHED Services

Transcription

1 Independent analysis of arrangements between SA Power Networks and CHED Services This report contains 27 pages _ CHED_Final Report_061012

2 Contents 1 Executive Summary Key Findings Service Agreements Total Annual Fees Benchmarking of total ICT operating costs 2 2 Background Background and Objectives CHED Services Scope of Analysis Service Agreements Total Annual Fees Benchmarking Prudency and Efficiency of ICT operating expenditure 5 3 Service Agreements FRC IT Services Contract Summary of Services Service Level Arrangements (SLAs) Good industry practice FRC Shared Services Contract Summary of Services Service Level Arrangements (SLAs) Contact Centre Contract Summary of Services Service Level Arrangements (SLAs) Service Level Arrangements (SLAs) Observations Service agreements review summary 14 4 Total Annual Fees Fixed fees Additional Fees Total Fees 18 5 Benchmarking Contact Centre benchmarking 19 6 Prudency and Efficiency of ICT Operating Expenditure Annual ICT Operating Expenditure (excluding depreciation) as a % of corporate operating expenditure (excluding corporate depreciation) Annual ICT operating expenditure (excluding ICT depreciation) as a % of corporate revenue; 21 _ CHED_Final Report_ i

3 6.3 Annual ICT operating expenditure (excluding depreciation) per user Summary of ICT Benchmarking Results 22 7 Appendix A Documents received and reviewed 23 Inherent Limitations This report has been prepared as outlined in the Approach Section. The services provided in connection with this engagement comprise an advisory engagement, which is not subject to assurance or other standards issued by the Australian Auditing and Assurance Standards Board and, consequently no opinions or conclusions intended to convey assurance have been expressed. No warranty of completeness, accuracy or reliability is given in relation to the statements and representations made by, and the information and documentation provided by management and personnel consulted as part of the process. KPMG have indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within the report. KPMG is under no obligation in any circumstance to update this report, in either oral or written form, for events occurring after the report has been issued in final form. The findings in this report have been formed on the above basis. Third Party Reliance This report is solely for the purpose set out in the Approach Section and for information, and is not to be used for any other purpose or distributed to any other party other than SA Power Networks without KPMG s prior written consent. This report has been prepared at the request of in accordance with the terms of your acceptance of the engagement. Other than our responsibility to, neither KPMG nor any member or employee of KPMG undertakes responsibility arising in any way from reliance placed by a third party on this report. Any reliance placed is that party s sole responsibility. Electronic Distribution of report This KPMG report was produced solely for the use and benefit of and cannot be relied on or distributed, in whole or in part, in any format by any other party other than SA Power Networks. The report is dated September 2014 and KPMG accepts no liability for and has not undertaken work in respect of any event subsequent to that date which may affect the report. Any redistribution of this report requires the prior written approval of KPMG and in any event is to be complete and unaltered version of the report and accompanied only by such other materials as KPMG may agree. Responsibility for the security of any electronic distribution of this report remains the responsibility of SA Power Networks and KPMG accepts no liability if the report is or has been altered in any way by any person. _ CHED_Final Report_ ii

4 1 Executive Summary In September 2013, KPMG was engaged to assist South Australia Power Networks (SAPN) understand some of the commercial terms and conditions used in its Full Retail Contestability (FRC) IT Services, Shared Services and Contact Centre services contracts with CHED Services (CHED). CHED is a related party with SAPN based on common parent company ownership relationship through CKI Utilities Ltd. CHED has provided specialised services to SAPN over the last two regulatory periods and will continue to provide services for the period. CHED also provides similar back office services to other businesses including Powercor Australia and Citipower which are Victorian based Network Service Providers (NSP). CHED s provision of these services enables leveraging of common specialised technology used in the sector and to achieve economies of scale in providing these services. As set out in our letter of engagement, across the three contracts, we have examined the areas of service agreements, total annual fees, benchmarking and prudency and efficiency of the Information Communication Technology (ICT) operating expenditure. Our assessment is based upon the information supplied to KPMG by SAPN and CHED, and the answers to the questions submitted by KPMG. Our scope excludes detailed financial analysis and performance benchmarking of the services contained in these contracts. 1.1 Key Findings Service Agreements There are three service agreements in place between SAPN and CHED. They are: FRC IT Services Contract; FRC Shared Services Contract; and Contact Centre Contract Since 2005, SAPN has outsourced services to CHED in order to leverage specialist expertise in similar operations and business processes capability that rely on CIS/OV systems in enabling FRC business processes. Originally, ETSA Utilities did not seek to tender in the open market for the FRC services as the services were specialised and it was able to leverage CIS O/V and other market system customisations that were already developed and functioning for the new FRC business processes. Each of the three contracts has a defined scope detailing the type of activity to be performed by CHED and established key performance indicators (KPIs) that are being reported regularly to SAPN. The services and terms under these contracts have been relatively static since We found that the KPIs are broadly consistent with good industry practice outsourcing arrangements. However, with the exception of the FRC Shared Services Contract, we found that there is no evidence of a link between failure by CHED to meet contracted standards for performance and subsequent impact on financial payments made to CHED as a part of the contracts. Based on a sample review of monthly performance reports and representations from SAPN, actual historical performance metrics have been satisfactory over time and therefore the absence of such arrangements is understood in the context and the history of the relationship. _ CHED_Final Report_

5 Within the SLA there is, however, provision for dispute steps, right of law and withholding payment process and impacts if appropriate Total Annual Fees We estimate that total fees paid to CHED Services for the period to approximate an average of $13 million per annum. The approximate breakdown in fees is as follows: 27% for FRC IT Services Contract; 51% for FRC Shared Services Contract; and 22% for Contact Centre Contract. Each of the three contracts clearly states the fixed fee for services provided. These fees escalate at CPI plus 1.5% each year. There is provision within the contracts for CHED to charge additional fees for services performed outside the agreed contracted services. This has been utilised by SAPN in the ICT area where regular ICT upgrades for IT technical changes are scheduled each year. KPMG has estimated the additional charges across the ten-year review period for the IT contract based upon the 2013 data provided to us Benchmarking of total ICT operating costs In summary, CHED FRC IT Service Contract fees make up approximately 12% of the overall SAPN s IT Operating Expenses (based on 2013 actual expenditures). In order to assess the reasonableness of the fees paid in relation to the FRC IT Services Contract, we have assessed the total ICT operating spend in comparison to KPMG s benchmarking ICT operating spend metrics in the Australian utility sector. This analysis has been performed at an aggregate level as there is insufficient information to benchmark individually the fee elements for the services contained in the three CHED contracts. This is due to the nature of the contracts which are based upon a whole of service provision fee structure rather than a fee per service offered approach. There is a single fee charged per contract per year irrespective of the number of service activities performed by CHED. This whole or service approach has been in place since the inception of the contracts. Consistent with KPMG s work in 2007 for SAPN s previous regulatory determination, and due to the specialised nature of the FRC services provided to SAPN, we were unable to benchmark the fees to other commercial arrangements. While there are several broader outsourcing arrangements in the sector, we have not found instances where back office services are outsourced exclusively for FRC services. Section 6 summarises our high level analysis of the benchmarking of SAPN ICT operating expenditure. Specifically, we found that: SAPNICT operating expenditures for 2012 and 2013 compare favourably to the industry mean across a range of operating expenditure, revenue and per user metrics; The SAPN benchmarking results are indicative of a lower use or efficient ICT operating expenditure base compared to other NSPs; SAPN 2012 and 2013 ICT benchmarking results are largely consistent with previous ICT benchmarking trend results conducted in prior years. SAPN consumed less IT expenditure in total on a comparative basis to its peers. _ CHED_Final Report_

6 Summary observations on efficient costs of the CHED contracts: Given that pricing of the CHED services are indexed to CPI, the ratio of the CHED services to total operating expenditures is expected to remain largely consistent over the next regulatory period. The fees have not been broken down per activity due to the whole of service approach to developing the charges associated with the CHED services contract. This makes it difficult to benchmark the activities but as the CHED services are set for the term of the contract, risks associated with increasing or decreasing activity volumes have been removed for SAPN. The CHED FRC IT services are an important component of the current overall ICT operating expenditure base. The ratio of the expenditure to the total ICT expenditure base has remained constant over several years. Given the inherent inability to benchmark the CHED FRC IT services to external pricing benchmarks, it is reasonable to consider understanding and assessing the overall efficiency of the ICT operating costs using commonly accepted aggregated benchmarking techniques. Recent industry benchmarking performed by KPMG of annual ICT operating expenditure costs has found that SAPN benchmarks favourably as an efficient ICT provider using a number of commonly accepted industry performance metrics. On the basis of the aggregated ICT operating benchmarking, we have not found evidence to indicate that the FRC IT costs in total are not efficient and therefore that by inference, that the CHED FRC IT services would materially impact the efficiency of the determination of prudent expenditure costs. _ CHED_Final Report_

7 2 Background In September 2013, KPMG was engaged to assist (SAPN) review some of the commercial terms and conditions within the IT Services, FRC Shared Services and Contact Centre contracts with CHED Services. CHED Services also provides these services to Powercor and Citipower. CHED is a related party to SAPN through a common parent company ownership. 2.1 Background and Objectives SAPN is the South Australian electricity distributor, and acquires various IT, FRC Shared Services and Contract Centre services from CHED Services, a related entity. SAPN has a formal contractual agreement in place with CHED Services to provide the services listed in the three contracts. SAPN has recently renewed the FRC Shared Services and Contact Centre contracts for five years. The IT services contract was renewed last year for a three-year period. There have been minimal changes to the three contracts with those agreed previously. SAPN is currently preparing its forecasts for regulatory submission to the Australian Energy Regulator (AER). As such, SAPN requires an independent report detailing the nature of the related party services and providing an assessment of the prudency and efficiency of the contracts in place. 2.2 CHED Services CHED Services is a service provider to three electricity distribution companies in south eastern Australia which includes Powercor, CitiPower and SAPN. SAPN and CHED Services are related parties through their parent company. CHED Services charges the three businesses for services provided. The charges SAPN will incur from CHED Services for contracted services in 2014 are approximately $14.6 million. The charges increase annually and are indexed to inflation. Within the contracts there is allowance for additional charges to be incurred for additional activity, as required. CHED provide ICT, market contestability services, and contact centre services that are described in further detail in section three of this report. The IT contract scope covers the application and infrastructure support for FRC (Full retail contestability) related applications. All other application and infrastructure support is the responsibility of SAPN. 2.3 Scope of Analysis Our analysis considers the following four scope items: Service Agreements Explain the nature of the services provided by CHED Services to SAPN and comment on whether the service arrangements, Service Level Agreements (SLAs) and Key Performance Indicators (KPIs) are in accordance with good industry practice. _ CHED_Final Report_

8 2.3.2 Total Annual Fees Quantify the total annual fees paid by SAPN to CHED Services both historically (five years) and forecast (five years) in aggregate groupings Benchmarking Analyse the service fee elements relative to available external benchmarks and comment on the prudency and efficiency where possible Prudency and Efficiency of ICT operating expenditure Analysis of the broader prudency and efficiency of total ICT operating expenditure costs. _ CHED_Final Report_

9 3 Service Agreements SAPN has multiple agreements in place with CHED Services. These agreements provide a range of services to SAPN and the services provided are summarised in the following contracts: FRC IT Services Contract; FRC Shared Services Contract; and Contact Centre Contract. These agreements have been in place for several years, with contracts provided for assessment as part of this engagement dating back to The contracts are reviewed at the conclusion of each term, with services generally staying the same with each revision. The key major difference with each revision is the total monthly cost for the services provided as part of each contract. 3.1 FRC IT Services Contract This section considers the FRC IT Services contract. This contract has been in place since 2005, having undergone three renewals within that time period. The current FRC IT Services contract has been in effect since 2013 and is due to expire in December Summary of Services Based on analysis of the contracts provided, there are numerous applications which are supported by CHED services and are revised during the contract renewal cycle. Below is a table of all applications that are either currently supported by CHED Services, or have been supported in the past. Summary of FRC applications supported by CHED Services Application Application Description Customer Information System (CIS/OV) Market Data System (MDS) MV-90 Business Objects Itron Enterprise Edition (IEE) Market Transaction System (MTS) Utility Service Bus (USB) SAP Business Warehouse Key: :- Application was supported :- Application was not supported _ CHED_Final Report_

10 For each application in the previous table, a range of services are provided by CHED Services to SAPN. A complete list of services is provided below: Summary of Services IT Services Service Description UNIX / Windows CHED Services provides services supporting the UNIX / Windows hardware, FRC system software and databases, network connectivity and support services necessary to run the FRC applications. Application Maintenance CHED Services provides application maintenance services for the applications which are supported under the IT Services contract. Application Development CHED Services provides application development services for the applications which are supported under the IT Services contract. Disaster Recovery Services CHED Services provides disaster recovery services for the applications which are supported under the IT Services contract. Documentation and Training CHED Services provides FRC application training and documentation for those applications which are supported under the IT contract as soon as practicable after receiving a written request from SAPN. Security CHED Services is responsible for providing information security administration for the FRC systems, FRC services, FRC applications and FRC data. Audit and Review CHED Services provides SAPN s auditor with access to CHED Services systems which are used to provide services to SAPN Service Level Arrangements (SLAs) Due to the nature of the services provided by CHED Services to SAPN, only two of the seven services listed have reportable KPIs within the SLA agreement. These KPIs are summarised below. Please note, the KPIs below are based on the IT Services contract, with good industry practices compared to this contract only. Service Description SLA UNIX / Windows Production environment availability Production environment reliability Production environment backups Production environment unavailable for no more than 90 minutes per month. Production environment unavailable for no more than 375 minutes per year. Production environment has no more than 2 outages greater than 15 minutes in length per month. Production environment has no more than 6 outages greater than 15 minutes in length per year. A backup of the production environment will be performed each business day before the commencement of business. _ CHED_Final Report_

11 Service Description SLA IEE / MTS meter data processing within timeframe Application Maintenance IEE / MTS network bill distributed to retailer IEE / MTS application support availability IEE / MTS availability CIS / OV Batch processing for billing CIS / OV support availability CIS / OV online availability SAP BI online availability General problem resolution 100% of meter data processing (including dispatch) will be completed by 1:30pm CST each business day. Each monthly, the Network Bill will be delivered to SAPN by the 9 th business day. 100% availability during business hours. Call out support for critical incidents. IEE / MTS unavailable for no more than 90 minutes per month. IEE / MTS unavailable for no more than 375 minutes per year. Batch processing will be completed according to system calendar, with all scheduled jobs completed each business day. 100% availability during business hours. Call out support for critical incidents. CIS / OV unavailable for no more than 90 minutes per month. CIS / OV unavailable for no more than 375 minutes per year. SAP BI unavailable for no more than 90 minutes per month. SAP BI unavailable for no more than 375 minutes per year. 100% of all calls are responded to within 30 minutes. Depending on the severity of the problem, the following SLAs apply: - Severity 1 95% resolved within 4 hours. Remaining 5% resolved within 8 hours. - Severity 2 95% resolved within 6 hours. Remaining 5% to be resolved within 12 hours. - Severity 3 95% to be resolved within 1 business day. Remaining 5% to be resolved within 2 business days. - Severity 4 95% to be resolved within 3 business days. Remaining 5% to be resolved within 6 business days. _ CHED_Final Report_

12 3.1.3 Good industry practice To determine if the current IT Services contract is considered to be good industry practice, a comparison was made to the international service management framework ITILv3. The ITIL framework describes a range of common service operation activities. Thes activities are considered to be good industry practice for delivering IT services, and as such would be expected in an outsourced IT support contract. The table below summarises common service operation activites and how the IT serivces contract does, or does not, align with the activites. Common Service Operation Activity Monitoring and Control IT Operations Mainframe Management Server Management and Support Storage and Archive Database Administration Directory Services Management Desktop Support Middleware Management Internet / Web Management Data Centre Management Information Security Evidence KPIs are evident within the IT services contract. From information available, these KPIs are reported monthly, however, evidence of actions for improvement when a KPI has been below expectations is not evident. CHED Services monitors and controls the status and availability of the FRC applications: all other applications are out of scope for CHED Services providing IT Operations support. From information available, there is no evidence that SAPN or CHED Services utilise a mainframe environment, therefore this item is out of scope for the IT Services contract. The IT Services contract has several services relating to the management support of the physical and virtual servers which the FRC applications are hosted. This includes monitoring performance, availability, capacity, procurement advice and any ongoing maintenance that is required. As part of the Windows and Unix services, CHED Services provides backup storage and archiving services for the FRC applications listed in the contract. As part of the Windows and Unix services, CHED Services provides database administration (physical and logical) for all FRC applications listed in the contract. CHED Services manages user access to FRC applications only on behalf of SAPN. As CHED Services is providing support for FRC applications only, the desktop environment is not in scope. CHED Services supports and maintains the middleware associated with the FRC applications. As CHED Services is providing support for FRC applications, internet and web management is not in scope As part of the Windows and Unix services, CHED Services provides Data Centre and facilities management. There is a dedicated scope item within the IT Services contract which has a comprehensive range of IT security services CHED Services will provide. _ CHED_Final Report_

13 Common Service Operation Activity Continuous Improvement Evidence From review of this contract, there is no evidence of assured continuous improvement. Furthermore, there are no improvement incentive clauses evident. The majority of the activities ITIL considers to be essential for an IT services contract are provided by CHED Services. It is acknowledged, that due to the unique circumstances between CHED Services and SAPN, not all of the ITIL activities are appropriate and required within the IT Services contract. Whilst the majority of the services align with good industry practice, the current agreement does not include an incentives based scheme encouraging CHED Services to undertake a continuous improvement program, which is explicity explained in the AER s Assessment Guidelines (section 5.1.2, Related Party Margins, p. 45). 3.2 FRC Shared Services Contract This section considers the FRC Shared Services contract. From review of the documentation, this contract has been in place since 2005, having undergone three renewals within that time period. The current FRC Shared Services contract commenced in January 2014 and continues through to Summary of Services Contracts covering the years 2005 through 2018 were reviewed as part of this engagement. Over time, the number of services provided by CHED Services to SAPN has remained static. The table below summarises the service provisions as part of the FRC Shared Services contract. Service Connection Services Revenue Management Description Connections involve receiving requests from retailers for the following tasks: Re-energisations; De-energisations; Special Reads; New Connections; Meter Alteration/Additions; Meter Abolishment; Meter Test; and Meter Reconfiguration. Revenue management involves managing the following billing and metering tasks: Network billing and credits; Billing adjustments; and _ CHED_Final Report_

14 Service Description Meter Data Provisioning Service Level Arrangements (SLAs) The FRC Shared Services contract has some SLAs and associated KPIs. The table below summarises the SLAs and KPIs currently implemented, with good industry practices compared to the 2014 to 2018 contract only. Service Level Target Service Descriptions Agreement Level Connection request Processed within 1 business day Connection requests from retailers are processed within 1 business day of receipt Cancellations and manual Processed within 2 business days 100% of cancellation requests and manual account creations are processed within 2 business days creation DMG NTMS AQs 100% within 5 business days Meter Reader Trouble 100% within 10 business days Initiate corrective action for any Trouble Reports on Meter Readings. Reports Late Bills < 400 < 400 late bills issued per month <$300k outstanding At the end of each month, there will be <$300,000 Retailer for accounts outstanding in Accounts Receivable for bills older than accounts receivable > 30 days 30 days. Data delivery >= 98% within 10 Data reads are performed daily and sent to retailers. to retailers days Settlement >= 98.5% 98.5% of settlement data delivered to AEMO data Provide meter data request 99.8% within 1 business day Deliver meter data when requested within 1 business day for 99.8 of requests Verify meter data request 90% within 5 business days Verify meter data when requested within 5 business days for 90% of requests In the Australian distribution sector, B2B activities are typically not outsourced, instead distribution businesses are more likely to manage these activities in house. As a result, it is difficult to find comparable data on key performance indicators for this activity. However, the above KPIs are within observed industry tolerances based on our experience of the market. In addition to the above indicators, every month CHED provides SAPN with additional data relating to late bills, ageing of debtors and cash received. This additional information enables SAPN to track CHED performance with respect to: Total volume of aged activity across the invoicing and collection cycle, Proportion of late bills, and Network credits, billing adjustments or meter data provisioning. _ CHED_Final Report_

15 The KPIs are reported on and reviewed on a monthly basis by both parties. At the end of each year an annual assessment is conducted and if, on an annual basis, CHED Services fails to meet some or all of these KPIs, the first payment for the following year of the fixed monthly fee is reduced by a rebate. The rebate is 0.5% of the amount which is equal to 12 times the fixed monthly fee for the previous year for each KPI not met by CHED on an annual basis, capped to a maximum reduction of 3% of the total amounts for the Contract Sum for previous year. The contract also provides for annual efficiency reviews. CHED Services and SAPN have met in the past 12 months to review the efficiency of core business functions and reports outlining findings and recommendations have been issued for corrective action. 3.3 Contact Centre Contract This section considers the Contact Centre Contract. From review of the documentation, this contract has been in place since 2005, having undergone three renewals within that time period. The current Contact Centre Contract commenced in January 2014 and is due to expire in December Summary of Services Review of the Contact Centre contracts from 2005 to 2018 indicate that the services provided to SAPN from CHED Services have been relatively static throughout. As such, the table below shows the range of services currently in the contract. Service Fault and Emergencies Street Light Faults Tier 2 After Hours Re- Energisations Description CHED Services accepts calls from SAPN customers and creates call logs recording the fault and customer details. The Fault and Emergency line is available 24x7, including public holidays. CHED Services provides an automated message system to capture and record all street faults reported by SAPN customers. In the event that the customer cannot use the automated service, CHED Services answers calls for street light faults during business hours. CHED Services accepts calls from SAPN Tier 2 retailers between 5:00pm and 10:00pm, Monday to Friday. CHED Services records the required information and enables the process for re-energisation as appropriate Service Level Arrangements (SLAs) As part of the Contact Centre contract, there are five measurable SLAs which CHED Services has agreed to meet. The table below summarises the SLAs in place between CHED Services for the Call Centre contract. _ CHED_Final Report_

16 Service Level Agreement Target Service Level Descriptions Grade of Service (Faults and emergencies, street light faults) 88.7% of calls answered in 30 seconds Grade of service (Life threatening calls) Number of abandoned calls Number of customer complaints relating to CSA service 100% of calls answered in 4 minutes 5% per annum <8% per calendar month Grade of service is the percentage of calls answered within 30 seconds. Measured on life threatening skill set An abandoned call is defined as: All calls offered to agents that are abandoned prior to the CSA answering the call. <1 per month per line Complaints relating to advice or attitude of CHED Services CSA representatives. Measured and reported for each service. < 1 per month Based on CSA call handling ability. Escalated feedback complaints In addition to these contracted KPIs, CHED also reports to SAPN on other common Contact Centres KPIs including: Calls offered Calls answered Average wait time Maximum waiting time These KPIs are tracked across: Call receipt points IVR SLO MSG Life Threatening calls Service Level Arrangements (SLAs) Observations Category of call Streetlights Faults CHED overall The KPIs being reported by CHED are typical of Contact Centre KPIs seen elsewhere in industry. Whilst these indicators are common best practice, the target service level for these indicators is not standard. Some specific observations about the target service levels are: Grade of Service The industry standard for Grade of Service is 80% in 30 seconds which is lower than the target for CHED. However, this can vary dependent on sector. A higher target service level usually equates to an increased fee. It is uncommon to see a 100% target, but, as this is for Life Threatening Calls this target is reasonable (as cited here for Life threatening calls). However this can be sustained if there is a fall back process just before the 4 mins mark kicks in such as an automated response which is counted as the call being handled or a re-routing of the call to a hunt group of additional contact points such as Team Leader mobiles. Abandoned calls _ CHED_Final Report_

17 The 5% target is industry standard. However, a Per Annum target is not best practice as it allows for large amounts of ABN rate variance throughout the year. Typically you would see this measured on a daily basis with a roll up for the month which is used against the target. However, as these calls are associated with significant disruptions from events outside the control of SAPN and CHED (e.g. weather events), a monthly target is reasonable. In addition, the 8% per calendar month does not correlate to the 5% per annum target. Customer Complaints This target is essentially 0% customer complaints which would be unachievable. The targets for this area can vary immensely as some contact centres are set up purely to handle customer complaints. Escalated Feedback Complaints As above this is a zero complaint target, even at a target of 1 per month it would be unachievable with the volume of calls they are receiving. Other Observations There were no KPIs or reporting provided that covered some of the other typical contact centre metrics: - Customer satisfaction - Quality monitoring In addition, whilst SAPN are tracking and managing Contact Centre call receipt KPIs, there does not appear to be a metric measuring the quality or timeliness of data captured by the - Contact Centre and provided to SAPN. For example, whether the information collected from a Life Threatening Calls received by CHED is sufficient for SAPN to respond and resolve the issue in a timely manner. Any issues that arise through this process are investigated by SAPN and appropriate training is provide to CHED as required to mitigate. There is also a gap in KPIs relating to evidence of actions for improvement when a KPI has been below expectations for an extended period. 3.4 Service agreements review summary Overall, the Service Agreements between SAPN and CHED incorporate the majority of the metrics that would normally be seen in an outsourced arrangement for the services being reviewed. Due to the nature of the relationship between SAPN and CHED, the Service Agreements appear to have been constructed to perform more of an oversight function than to be used as a tool to manage performance of the outsource provider (CHED). Some of the challenges associated with this type of Service Agreement structure include: There is no clause within the contract to allow CHED to charge for higher volumes of work received under these contracts (e.g. increasing call volumes or increasing requests for metering services); No opportunity for SAPN to reduce the fees where volumes of work are reducing; and _ CHED_Final Report_

18 No explicit requirement or incentive to undertake continuous improvement activities. However, it was noted that the contract does include an innovation clause, whilst this does not directly relate to a continuous improvement scheme, it enables SAPN and CHED to discuss opportunities for improvement on a regular basis. _ CHED_Final Report_

19 4 Total Annual Fees The three contracts in place between CHED Services and SAPN have a detailed costing formula to calculate the monthly cost of each agreement. The contracts do not break the cost down by service and only provide an aggregate total for all services. As such, SAPN has fixed monthly fees which only change annually based on CPI increases. There are provisions to allow for additional services to be performed by CHED Services on behalf of SAPN, these additional services are charged on an ad-hoc basis as required. 4.1 Fixed fees The table below summarises the fixed fees SAPN is charged for the three contracts in place. The fees for the first year of the FRC Shared Services and Contact Centre contract are stated within the agreement. However, fees for any consecutive years of these two contracts are calculated utilising the following formula: FFFFFF SShaaaaaaaa SSSSSSSSSSSSSSSS aannnn CCCCCCCCCCCCCC CCCCCCCCCCCC AAAAAAAAAAAA ffffff = pppppppppppppppp aaaaaaaaaaaa ffffff + (pppppppppppppppp aaaaaaaaaaaa ffffff (cchaaaaaaaa iiii CCCCCC + 1.5%) ) As with the FRC Shared Services and Contact Centre contracts, the IT Services contract has a fee for the first year of the contract stated in the agreement. However, consecutive years are calculated using a slightly different formula as detailed below: IIII SShaaaaaaaa SSSSSSSSSSSSSSSS AAAAAAAAAAAA ffffff = pppppppppppppppp aaaaaaaaaaaa ffffff + (pprreeeeeeeeeeee aaaaaaaaaaaa ffffff cchaaaaaaaa iiii CCCCCC ) Please note, all fees within section 4.1 are exclusive of GST. Forthcoming Period Fixed Fees ($ thousands) Contract Total IT Services 3,757 3,858 3,962 4,069 4,179 19,826 Data Storage Shared Services 7,920 8,134 8,353 8,579 8,810 41,796 Contact Centre 3,144 3,229 3,316 3,406 3,497 16,592 Total 14,946 15,349 15,764 16,189 16,626 78,876 For the forthcoming period forecasts, a series of assumptions have been made to enable the calculations. Below is a summary of the assumptions that have been made to enable the calculations. The Shared Services and Contact Centre annual costs for 2015 to 2018 have been calculated based on the formula discussed above in section 4.1. The year on year cost increases are based on assumed increases in CPI. For the purpose of these calculations, CPI is assumed to leverage SAPN s base year CPI (i.e. 2013) for annual costs. As such, the assumed CPI for 2015 to 2018 is 2.7% per year costs for Shared Services and Contact Centre are not included in the contracts. As such, it has been assumed that the same formula for calculating annual cost increases between 2015 and 2018 be leveraged to calculate the 2019 cost annual costs for IT Services are based on the current contract which is due to expire in December Therefore, it has been assumed that the formula to calculate the annual cost increases for 2015 be leveraged and applied to calculate an estimated cost for the remaining regulatory period (i.e to 2019). _ CHED_Final Report_

20 Data storage fees are calculated on the costs available within the IT Services contract. These fees are captured on their own line item as they appear as such on the IT Services invoices. The costs have been escalated according to CPI for the years not covered within the existing contract. As with the forthcoming regulatory period, the table below summarises the aggregate total fixed fees paid by SAPN in the current period. These fees have been calculated based on the formula summarised at the beginning of section 4.1. Invoices provided to KPMG for the 2013 year are consistent with the below figures. Current period fixed fees ($ thousands) Contract Total IT Services 3,374 3,479 3,555 3,562 3,658 17,628 Data Storage Shared Services 6,279 6,495 6,644 6,850 7,712 33,981 Contact Centre 2,268 2,578 2,638 2,719 3,061 13,264 Total 12,031 12,665 12,953 13,225 14,553 65,453 A series of assumptions have been made to calculate the annual costs for each year. These assumptions have been summarised below. Data storage fees for 2009 are based on the price per gigabyte listed in the IT Services contract. The prices for 2010 onwards are based on the IT services contract. It is assumed to be the same value year on year based on the information available. CPI has been sourced from the Australian Bureau of Statistics for each financial year captured in this table. For completeness, the CPI values we have used are summarised in the table below. CPI CPI 2.3% 3.1% 2.2% 2.7% 2.7% The IT Service fees calculated for FY10 to FY13 assume that the new IT platform MTS/IEE was in effect from January As such, the annual cost has been calculated using the fees associated with supporting the upgraded system. All costs have been calculated using the formula in section 4.1, as per the IT Services, Shared Services and Contact Centre contracts. 4.2 Additional Fees In addition to the fixed fees listed above, the three contracts state that additional services can be provided to SAPN. From review of the available documentation, we are not aware of any additional fees charged to SAPN under the Contact Centre or the Shared Services contracts. On review of the IT Services contracts between 2005 and 2015, we observed a provision for CHED to charge SAPN an additional software and maintenance fee for the CIS/OV and Itron applications. SAPN has provided evidence of an annualised invoice for 2013 detailing the total _ CHED_Final Report_

21 fees payable by SAPN for the software and maintenance support fees for the CIS/OV application. We have assumed this fee is representative of annual fees charged for the previous five year period and will be consistent with future year fees. CPI has been applied to the additional fees at the same rate as applied to the fixed fees. As such, these costs have been included in section 4.3 Total Fees. (CHED has advised that negotiation with Itron has led to a significant reduction from previous forecast and that the 2013 contribution has been calculated at $230,000). Additionally, management have indicated a series of small fees have been charged to SAPN under the additional services clause within the IT Services Contract. Evidence has been provided for the fees charged during the period. Based on information available, we have assumed that small fees of this magnitude are not unrealistic, and similar fees would be expected each year, with adjustments made to consider CPI as appropriate. The table below shows the fees we have observed during our review. Additional Fees observed ($ thousands) Type Period Amount CIS/OV Software and Maintenance Small Changes Total Fees To determine the total fees paid by SAPN to CHED Services, the fixed fees, plus the additional fees we were able to identify have been included in the table below. Total fees paid Current Period ($ thousands) Contract Total Fixed Fees 12,031 12,665 12,953 13,251 14,553 65,453 Additional Fees 1,290 1,320 1,363 1,394 1,431 6,799 GST 1,332 1,399 1,432 1,464 1,598 7,225 Total 14,653 15,385 15,748 16,109 17,583 79,477 Total fees paid Forthcoming Period ($ thousands) Contract Total Fixed Fees 14,946 15,350 15,764 16,190 16,627 78,876 Additional Fees 1,470 1,510 1,550 1,592 1,635 7,757 GST 1,642 1,686 1,731 1,778 1,826 8,663 Total 18,058 18,545 19,046 19,560 20,088 95,267 Over the current regulatory period our analysis shows SAPN has paid $79 million in fees to CHED Services. This increases year on year for the forthcoming regulatory period, with the total fees paid to CHED Services for expected to total $89 million. _ CHED_Final Report_

22 5 Benchmarking The contract between SAPN and CHED is a fixed rate all inclusive contract priced for the total suite of activity rather than based upon costs for individual service offerings. As such, it has not been possible to undertake benchmarking of the Shared Services contracts or services under review. 5.1 Contact Centre benchmarking Accurate benchmarking of Contact Centres is challenging with call complexity and hours of operation having a significant impact on cost per call. The calls received by CHED on behalf of SAPN cover a range of issues, including: Streetlights Faults Life threatening calls Retailer related issues The Contact Centre operates 24 hours a day, 7 days a week for some call types, such as life threatening calls, and shorter hours for other call types, such as streetlights. Due to the varied operating hours across the call types and the range of complexity of calls offered, undertaking a thorough benchmarking of the CHED Contact Centre is not possible. Since 2010, CHED s average handling time has been improving, with over 10% improvement in the period 2010 to This improvement has not been reflected in the cost structure in the revised Contact Centre contract but has increased the average cost per call. _ CHED_Final Report_

23 6 Prudency and Efficiency of ICT Operating Expenditure Since 2002, KPMG has conducted a detailed biannual ITC benchmarking study, attracting over 30 organisations from electricity, gas, and water utilities across Australia and New Zealand. Each organisation payed a fee to participate and received a personalised benchmarking report. The studies covered a range of topics agreed with the CIOs including: financials, resourcing, applications, hardware, security, service delivery, outsourcing, project delivery, and strategic issues. The depth of operational metrics analysed allowed participants to not only identify where they stand relative to commonly measured IT performance indicators, but to explore potential areas of inefficiencies and tangible cost savings. In 2013, KPMG initiated the benchmarking engagements for the electricity distribution industry across Australia. SAPN was one of many organisations participating in the engagement. A series of key benchmarks have been selected from the KPMG 2013 Benchmarking report to compare SAPN s IT operating expenditure to the industry. The IT operating expenditure benchmarks selected include: Annual ICT Operating Expenditure (excluding depreciation) as a % of corporate operating expenditure (excluding corporate depreciation); Annual ICT operating expenditure (excluding ICT depreciation) as a % of corporate revenue; and Annual ICT operating expenditure (excluding depreciation) per user. This benchmarking report is focusing on the overall SAPN Operating Expenditure, of which approximately 12% is the fee paid to CHED services. 6.1 Annual ICT Operating Expenditure (excluding depreciation) as a % of corporate operating expenditure (excluding corporate depreciation) In 2012, the industry average for the percentage of annual ICT Opex compared to Corporate Opex was 6.59%. By comparison, SAPN s result was 6.37%. When reviewing the same benchmarking using 2013 actuals, we can see the percentage for the industry average has increased to 6.91%. Additionally, SAPN s own benchmark has increased and now sits about the industry average at 7.09% Benchmarking Results 2013 Benchmarking Results 12.00% 12.00% 10.00% Maximum: 9.46% 10.00% Maximum: 9.77% 8.00% 8.00% 6.00% Mean: 6.59% 6.00% Mean: 6.91% 4.00% Minimum: 3.74% 4.00% Minimum: 3.55% 2.00% 2.00% 0.00% SA Power: 6.37% SA Power 0.00% SA Power: 7.09% SA Power _ CHED_Final Report_

24 This increase between 2012 and 2013 can be attributed to an increase in both corporate and IT Opex over the one year period. The larger gain in IT Opex is attributed to IT Opex costs increasing at a faster rate than corporate Opex. 6.2 Annual ICT operating expenditure (excluding ICT depreciation) as a % of corporate revenue; During 2012, the industry average for annual IT Opex as a percentage of corporate revenue was 4.25%. Within the same period, SAPN was below the average with a benchmark score of 3.55%. In 2013, SAPN continues this trend as is once again below the industry average. During this period the industry average was 4.21%, with SAPN s benchmarking score coming in at 3.80% Benchmarking Results 2013 Benchmarking Results 7.00% 6.00% Maximum: 5.85% 7.00% 6.00% Maximum: 6.55% 5.00% 5.00% 4.00% Mean: 4.25% 4.00% Mean: 4.21% 3.00% 2.00% Minimum: 2.66% 3.00% 2.00% Minimum: 2.43% 1.00% 1.00% 0.00% SA Power: 3.55% SA Power 0.00% SA Power: 3.80% SA Power As we can see from the benchmarking survey results, SAPN is in the lower quartile for both 2012 and 2013 when compared to the benchmarking group. This is due to SAPN reporting the second lowest IT Opex (including depreciation) of the benchmarking group. _ CHED_Final Report_

25 6.3 Annual ICT operating expenditure (excluding depreciation) per user In the context of the benchmarking survey an IT user is defined as the number of current active domain users. As such, the in 2012 the industry average was to spend $11,041 per user. As a comparison, SAPN was below the industry average, having the lowest benchmark score of the group with $8,916. When comparing to the 2013 survey results, SAPN is still below the industry average. The industry average IT Opex spend per user was $11,381 whereas SAPN s spend was $9, Benchmarking Results 2013 Benchmarking Results $20,000 $18,000 $16,000 $14,000 Maximum: $16,023 $20,000 $18,000 $16,000 $14,000 Maximum: $16,895 $12,000 $10,000 $8,000 $6,000 Mean: $11,041 Minimum: $8,897 $12,000 $10,000 $8,000 $6,000 Mean: $11,381 Minimum: $6,985 $4,000 $4,000 $2,000 $- SA Power: $8,916 SA Power $2,000 $- SA Power: $9,121 SA Power 6.4 Summary of ICT Benchmarking Results From the results presented within KPMG s benchmarking survey, SAPN scores below the mean on two of the three benchmarks discussed for ICT operating expenditure. These lower ICT costs indicate SAPN has a prudent and efficient ICT department when compared to the benchmarking group. Whilst CHED services is only 12% of the overall ICT operating spend, this is still considered to be a material amount of the overall ICT operating expenditure. The indication of a prudent and efficient overall SAPN ICT operating spend can therefore be used as an indicator of the performance of CHED, with the strong indication being that the CHED services are being provided in a prudent and efficient manner. _ CHED_Final Report_

26 7 Appendix A Documents received and reviewed The following table summarises the documents provided SAPN that were reviewed as part of this engagement. Document Name Document Name Attachment F.12 KPMG report IT FRC & Item-1 Nov 2013 SLA FRC IT.pdf Call C.pdf Call Centre SLA (real).pdf Item-2 Call Centre SLA pdf Call Centre SLA pdf Item-2 Call Centre SLA pdf Call Centre SLA pdf Item-2 SLA Bonus and Rebate Scheme pdf Call Centre SLA pdf Item-2 SLA Bonus and Rebate Scheme pdf CC SLA Invoice pdf Item-3 Contact Centre SLA Signed Copy (final).pdf CC SLA Report January 2014 Item-3 Final SAPN - CHED Contact Centre Reconciled.xlsx 2014 SLA Agreement.docx CC SLA Report November 2013.xls Item-3 Final SAPN - CHED Contact Centre 2014 SLA Schedule2.docx CHED - SAPN FRC IT Support Services Item-3 Final SAPN - CHED Contact Centre Agreement v10.4(2013 to 2015).doc 2014 SLA Schedule3.doc CHED Services contract - signed Item-4 CHED-SAPN FRC IT Support 2013.pdf.pdf Services Agreement doc CHED to ETSA FRC IT Support Services Item-5 CHED - SAPN FRC IT Support Agreement doc Services Agreement Finalised (Unsigned).doc CHED to ETSA FRC IT Support Services Item-5 SAPN ITSLA2013to15.pdf Agreement SLA (signed).pdf CHED to ETSA FRC Shared Services Item-6 CHED-SAPN FRC IT Support Agreement doc Services Agreement doc CIS OV Support and Maintenance Jan to Dec Item-7 SAN Requirements.JPG 2013.pdf Draft CHED to SAPN FRC Transition Out SAPN KPI report - Apr 2013.pdf Schedule (130913).doc Draft SAPN - CHED Services Contact SAPN KPI report - Aug 2013.pdf Centre Contract 2014v0.2.doc Draft SAPN - CHED Services Contact SAPN KPI report - Dec 2012.pdf Centre SLA Schedule2v 0.5.docx Draft SAPN - CHED Services Contact SAPN KPI report - Feb 2013.pdf Centre Transition OutSchedule v 0.1.doc Draft SAPN CHED Services FRC SAPN KPI report - Jan 2013.pdf Agreement 2014 (130913) 2014to 2018.doc Draft SAPN CHED Services FRC Schedule SAPN KPI report - July 2013.pdf (130913).doc _ CHED_Final Report_