An industry analyst has raised concerns over the proposed abolition of code panels as part of planned reforms to energy code governance.
Tom Edwards, senior modelling consultant for Cornwall Insight and a member of the Balancing and Settlement Code panel, said the code managers that would take on many of the panels’ functions may lack their frontline expertise.
As part of a joint consultation with the Department for Business, Energy and Industrial Strategy (BEIS), Ofgem proposed last week that either itself or some other “strategic body” should oversee a series of code managers that would take a more proactive role in the development of code modifications than the code administrators they would replace. This would include making recommendations to Ofgem as is currently done by the “industry-led” code panels.
BEIS and Ofgem identified this as their preferred of two previously suggested options, with the alternative being that the functions of the strategic body and code managers are combined into an “integrated rule-making body” – a role that would likely be fulfilled by National Grid Electricity System Operator (ESO) following its proposed transformation into a fully independent Future System Operator.
They said industry would still have some input to the process through “stakeholder advisory forums.”
“One of the main complaints that has often been levelled at the code process is that it’s beholden to the biases of the industry, who basically provide a whole bunch of the labour for doing the code governance,” Edwards explained.
“In the new structure, the code manager is kind of like the judge, jury and executioner – all in one – because they can propose changes, they prioritise changes, they run the work groups if they want to, they can finalise the changes themselves and then they can decide if the changes should be recommended to Ofgem.”
“So, this body has got quite a lot of power in the rule change process and the only official point at which the industry or consumers or other parties can get involved is the stakeholder advisory group, which will be equivalent to a panel of industry representatives, consumer representatives and academics. And they would be able to question and interrogate the code manager but none of what they decide or tell the code manager is binding in any way.”
Edwards acknowledged that this arrangement would speed up the code change process but said code managers may not possess the same level expertise as the code panels: “If you’ve got one body that can raise a change, design the change and then agree the change, then it can all happen much quicker. You don’t have to get as many people around the table.
“There is benefit in that, which I don’t deny, but I just feel you’ve lost some of the transparency and maybe some of the expertise, and perhaps these bodies might have to be more expensive than the current system, because the code managers as they exist today don’t have the breadth of expertise that industry brings to the code change process.”
“The code managers are not going to be the people of the frontline delivering net zero,” he added. “You need the people in the front line as well and you can’t just delegate off to a code manager whose main role will be delivering the rule book, not thinking about the commercial implications of those rules.”
Edwards said he also recognises the issue of industry capture of regulation but said this is not inherent to code panels and could be avoided by having Ofgem play a greater role in the selection of panel members, most of which are currently elected by signatories to the corresponding codes.
He said his concerns could be alleviated by giving greater powers to the proposed stakeholder advisory forums: “It could be that the advisory group has a recommendation and the code manager has a recommendation and if they disagree Ofgem has to explain why they chose one over the other.”
Alternatively, the stakeholder advisory groups could have the power to send code modifications back to the code manager to reconsider, with the code managers able to appeal to Ofgem to override the stakeholder advisory groups if they remain in disagreement.
Edwards additionally criticised the proposal to appoint code managers through competitive tendering, describing it as “competition for competition’s sake”.
“Competition is not going to drive excellence in this area,” he remarked. “They’re not going to revolutionise the world through innovation.”
He expressed fears that competitive tendering could push code managers to prioritise reducing costs over providing the best service: “I don’t think that having competition for code managers is a good idea and history tell me that is the case because, in customer surveys of current code managers, the not-for-profit ones do better than the for-profit ones.”
Andy Manning, head of energy networks and systems at Citizens Advice, was more supportive of the proposals. As the statutory advocate for consumers, the charity has reserved seats on a number of the code panels.
“We’re confident that the consumer voice certainly won’t be worse represented and could potentially be better represented in the new way forward,” said Manning.
“It’s not an efficient process at the moment and it’s very fragmented,” he stated. “There are different processes for different codes. Effectively you’ve got this cottage industry around code change so I think it has to become more efficient by having this joined up process and having the code managers do more of the heavy lifting must make the overall thing more efficient, being less reliant on disparate parties.”
He continued: “You don’t want to be relying on the industry to do the analysis and to be driving the process but you don’t want to lose the expertise, which is why you need the advisory forums to provide that expertise.”
Manning warned against giving too much power to the stakeholder advisory forums: “It needs to be different to the level of involvement at the moment. If you just replicate work groups and panels but just call them something else that’s not going to provide those efficiency gains.”
“We recognise that in some circumstances you might need sub-groups if there are elements that are just so detailed you do need that expertise, but we wouldn’t want that to be the default position.”
Manning instead emphasised the importance of getting the appeals process right: “As a point of principle, you need a proper appeals process in the hope of never having to use it because the fact there is a route to appeal is a step towards guaranteeing rigour in the process.”
He said this process needs to be accessible: “For the appeals process to work in a fair way, it has to be a process which isn’t overly expensive or cumbersome. There has to be support for parties like us to get involved in the appeals process.”
Material code modifications – those approved by Ofgem – can currently be challenged through either judicial review or appeal to the Competition and Market Authority (CMA). The consultation proposed either continuing this approach or limiting challenges to just judicial review.
“I think the CMA is generally going to be the right vehicle because judicial reviews are about process, whereas we want the reviews to be about the decision taken and the merits of it,” said Manning.
“The concern is that for either of those routes, they can become quite legalistic and therefore relatively expensive. The danger is you’ll have something which looks like all parties have access to these appeals routes but in practice it’s only those with the resource.”
“The RIIO price controls are a good example,” he commented. “In theory, we can appeal the price controls but we just don’t have that sort of budget to do it so it looks symmetric in theory but in practice we couldn’t afford it without additional support.”
Manning welcomed the proposal to allow any party to raise a code modification, but likewise said they need to have access to the appropriate resources.
He added: “It’s good that you allow everyone to raise modifications but you’ve then got to have a manageable process so they key is going to be the code manager being empowered to decide which mods should go forward and then decide with what priority they should be treated against published and consulted upon criteria.
“That’s going to be important because you can imagine that could be another way of suffocating the process.”
He said the reforms should also be used a chance to clarify the purpose of the codes: “There’s now the opportunity to look at what the objectives for the various codes are and bake into those objectives consumer interests. It’s not directly mentioned in the objectives at the moment.”