Following a u-turn from the Competition and Markets Authority (CMA), brought on by a warning from former Energy and Climate Change Committee chair Tim Yeo against a “lack of transparency”, the initial submissions to its inquiry into Ofgem’s network price controls were published late on Friday afternoon.
The so-called ‘slow-track DNOs’ have put in a joint submission, although more in-depth responses are included from Electricity North West (ENW), Scottish Power Energy Networks (SPEN) and UK Power Networks (UKPN), and further submissions are made by Scottish Hydro Electric Power Distribution (SHEPD) and Southern Electric Power Distribution (SEPD) – both subsidiaries of SSEPD – as interested third parties.
The general gist of the submissions is that British Gas is wrong, has “erred” and its arguments are “without foundation”. The firm has been collectively slated, and the CMA advised to dismiss the appeal and not grant the relief sought.
Ofgem and SSE accuse British Gas of ‘cherry-picking’ parts of the price control which it does not support, in an “inappropriate and unacceptable” move. The DNOs also criticise the firm for having “misunderstood the issue generally” and making “erroneous allegations”.
It is perhaps no surprise that the parties under scrutiny would take the hard line to protect their revenues. And British Gas takes an equally hard line. “These complaints are hard to understand,” it says. “Whatever the standard of review that is to be applied, the nature of an appeal is that it requires the appellant to identify where the decision‐maker has erred; the appellant cannot sensibly be asked to appeal against those aspects of the decision with which it does not take issue.”
The probe was seemingly inevitable. With the debate around energy affordability and network costs bubbling under the surface for months, the dispute finally came to a head when the case was brought to the CMA by British Gas in early March.
The energy supplier, a long-standing critic of Ofgem’s “lenient” price controls, said it was appealing against the £17 billion eight-year price settlement for the network companies, RIIO-ED1. Northern Powergrid, one of the five DNOs affected, also made a referral, on the grounds that the control on how much the network can charge is too steep given its investment plan.
However, at the time British Gas said, in a document seen by Utility Week, that its grounds for believing controls should be tighter included the return of “double-recovered” revenues; Ofgem’s asset life policy; the cost of debt; and procedural issues.
The networks will be kept on tenterhooks for the next month, until the CMA determines the appeal.
The issues:
1. Double-recovered revenues
British Gas argues that Ofgem chose an “inappropriate” mechanism to return revenues relating to certain excluded services that were double-recovered in the previous price control period (DPCR5). This, the firm says, fails to take into account the interests of consumers and risks setting an inappropriate incentive for DNOs to “over-recover” in the future.
The DNOs say British Gas is incorrect and its suggestions “unfounded” as it has “misunderstood the position”. “There was no over-recovery of revenues,” the submission says. “The issue concerned the treatment of costs. It would therefore be inappropriate to make any cash payment to consumers.”
2. Incentive targets for IIS and BMCS
British Gas objects to the interruptions incentive scheme (IIS) and broad measure of customer satisfaction scheme (BMCS) targets set by Ofgem for RIIO-ED1. It argues that the targets are based on outdated information, are too lenient and are, therefore, likely to lead to rewards for DNOs without sufficient improvements in performance.
The DNOs, again, say these arguments are “without merit” as the targets set by the regulator were “determined in a rational and systematic way, with due regard for the interests of consumers”. They claim IIS and BMCS have delivered, and continue to deliver, “significant efficient improvements (30 per cent) in interruptions and restoration performance”.
3. Change to information quality incentive (IQI)
The IQI was introduced in the DPCR4 price control to encourage DNOs to provide business plans that reflect best available information about future efficient expenditure requirements. British Gas disputes Ofgems decision to make an “unwarranted ex-post change” to the IQI matrix after the DNOs had submitted their business plans, which it argues gives an “undue financial benefit” to DNOs by increasing their allowable returns by around £290 million over the course of ED1. This, it says, is harmful to consumers “without any countervailing benefit”.
The DNOs say these claims are “without foundation”. The IQI, they argue, has resulted in more efficient business plans being submitted that were £743 million lower than their original plans, ensuring lower bills for consumers, both in the RIIO-ED1 price control period and in future price control periods.
4. Change in asset life policy
In 2010, Ofgem decided extend the regulatory depreciation period of assets. Before the RIIO-ED1 review decision, assets were assumed to have a 20-year life for the purposes of the depreciation charges which are allowed in price control revenues, even though the physical life of assets can be much longer.
The change in regulatory policy aimed to provide for a fairer balance between the interests of existing and future consumers; in both designing and implementing the change to asset life policy. British Gas states that the transitional arrangements Ofgem is putting in place to implement its change in asset life policy are “harmful to the interest of consumers”, both existing and future.
The DNOs, however, argue that current consumers aren’t paying more than is “economically appropriate” for their use of DNO assets. Ofgem’s decision to impose transitional arrangements is an “appropriate and standard regulatory response” to the potential “cliff-edge” its policy change could otherwise create in DNOs’ revenues and hence in consumer charges, they add.
5. Change in cost of debt indexation
British Gas alleges that Ofgem was wrong to change its approach to the assessment of cost of debt in its draft determinations by extending the trailing average (a measurement of a company’s financial health) to beyond 10 years. This change of approach, it says, “creates significant additional costs for consumers … and is therefore not in the interest of consumers absent any strong countervailing justification”.
However, the DNOs argue that British Gas has “misunderstood the statutory framework” under which Ofgem operates, taking an “overly simplistic and short-term view” of what the principal objective requires and making points of appeal which are “mere disagreements” with Ofgem’s regulatory judgement.
“A mere difference of opinion between a commercial entity and the is not a sufficient basis for allowing an appeal,” they say.