The former head of one of Ofgem’s predecessors has renewed his call for network price controls to be negotiated between companies and the customer and challenge groups already set up to scrutinise their business plans.
Stephen Littlechild, who led the Office for Electricity Regulation during the 1990s, said this could be an ongoing process, enabling adjustments to be made throughout price control periods.
Littlechild made the comments in the foreword to a recently published report from the consultancy Stonehaven. The paper commissioned by gas distribution network Cadent proposed the adoption of ‘pathway planning’ for distribution networks, whereby companies would develop plans to meet multiple branching pathways as a way to manage uncertainty over the future demands that will be placed on networks.
The report suggested these pathways should be developed by the Regional Energy Strategic Planners due to be created by the National Energy System Operator, which should also set the thresholds for unlocking the corresponding packages of investment. It said the pathways and thresholds could be scrutinised by the existing customer and challenge groups.
During his time in office, Littlechild said “frequent public controversy” over regulatory price controls “led me to explore whether other countries did it better.”
“I discovered that in parts of the US, and elsewhere, concerned customer groups occasionally negotiated with regulated companies and proposed an agreed settlement to the regulatory body, which it was grateful to accept,” he recalled.
“I suggested that Ofgem and Ofwat encourage such an approach. The challenge groups referred to have been one very positive outcome, enabling business plans that are more soundly based and generally acceptable.”
But Littlechild said regulators have “reserved to themselves the actual setting of the price controls” and disputes have continued, for example, over whether they should “aim off” when projecting costs to make sure companies can attract investment.
He continued: “So my suggestion is that customer and challenge groups be encouraged to negotiate with the regulated companies on the actual price controls as well as on the underlying business plans.
“Of course, not all these negotiations would necessarily be successful, in which case Ofgem would need to step in. Ofgem would also need to be satisfied that any proposed price control was consistent with its statutory duties.”
Littlechild said this could have multiple benefits, firstly that: “The participating parties would come to a better understanding of each other’s concerns, and would explore different ways of accommodating them, rather than abandoning the decision to Ofgem, with its necessarily uncertain outcome.”
Secondly, they would be able to explore, develop and possibly adopt “more innovative approaches than it would be possible for Ofgem to do”. He said this “quasi-rivalrous” would enable them to discover “what works well and what doesn’t.”
Lastly, the negotiating parties would “gradually develop mutual trust, conducive, for example, to adjustments within a price control period”. These adjustments could include “conceding that a successful cost reduction programme might mean that not all of an earlier-agreed price increase needs to be taken” or that “an unexpectedly costly investment programme might merit a higher allowed revenue than previously agreed.”
“This in turn would lay the basis for these parties to consider the case for new investments on an ongoing basis. That is, rather than having to agree an investment programme once every five years or so, or having to specify in advance elaborate branching pathways and investment triggers, they could assess investment proposals as and when the time seemed ripe to do so.”
He said this would more closely resemble a “customer-focused market process” than the current “heavy-handed regulation.”