When energy secretary Ed Davey had the network bosses up after the Christmas storms, he joked that they were “the real big six”. It got Steve Johnson worried for a moment. “I asked him to find another name for us,” smiles the chief executive of Electricity North West (ENW). But Davey isn’t the only one to draw analogies between distribution network operators (DNOs) and their cousins in supply. And following the December storms, the six DNOs have come in for their own share of political flak.
It was a tough Christmas. Johnson had to refuse a plea for help from his opposite numbers down south when the first storms struck on 23 December, because he had a Met Office forecast warning him the extreme weather was headed his way. Sure enough, the storms struck the north on 27 December, with winds raging so hard that ENW couldn’t send out staff for six or seven hours. In the media and political fallout that followed, many seem to have forgotten that there were two major events, and that the northern networks couldn’t help their peers like they did after St Jude two months before.
In January, there’s another type of storm to contend with. Utility Week meets Johnson in his spacious office in a Warrington business park the week after the sit-down with Davey, just days before the “network six” were due to face a select committee on how they handled the storms. Smiling and charming as ever, Johnson is nevertheless steely in his defence of ENW’s record, insisting that the business couldn’t have done better, and proudly quoting statistics, including that just 11 customers were off power for more than 48 hours.
You can understand Johnson’s pride in Electricity North West. He joined the business five years ago – or rather, he rejoined, as he cut his teeth at its predecessor Norweb as a trainee engineer. When he took over as chief executive in 2008, the business had just 100 staff, with all its maintenance and construction work contracted out to United Utilities. Johnson brought this back in-house in 2010, creating a business that today has 1,300 staff and an operating profit of £225 million in 2012/13, up from £189 million the previous year. While ENW is one of the smaller DNOs, holding just one licence, it punches above its weight in industry profile and leadership, with Johnson currently chair of the Energy Networks Association and the Department of Energy and Climate Change (Decc) Smart Grid forum.
The business has a strong track record, and is recognised for innovation, having won support from the Low Carbon Networks Fund in all three funding rounds. Customers are enjoying the fruits of this – the network already has considerable self-healing capacity, with 4,000 customers restored to power within three minutes during the storm without any human intervention. Such innovation has also led to £100 million of efficiency savings. ENW has proposed average price cuts of 11 per cent in the next price control period, the largest of all the networks.
Until last autumn, ENW was widely tipped to win coveted fast-track status in the first round of RIIO. In the event, only WPD was accorded that honour, with ENW narrowly missing out on just one score, around cost efficiency. Johnson admits to being “very disappointed”: “We were very close, and the more we look at it, the closer it seems.” ENW will resubmit its plans in March, with a focus on explaining cost efficiency around asset management. Johnson says there will not be wholesale change of the business plan, adding: “It was a well justified business plan when we submitted it. We really did push the boundaries in terms of the price reductions we were giving customers.”
There’s another sticking point in the numbers, this time over cost of equity. Ofgem is consulting on changing the way it calculates this, to bring it in line with the Competition Commission. Industry sources have told Utility Week this could cost the networks £60 million a year, although Johnson says he does not recognise that figure. ENW, like the other networks, has submitted its response to Ofgem, although they are all understandably coy about publicly arguing against a change that could see a reduction in consumer bills.
ENW bid a higher number on cost of equity than the other networks, at 6.8 per cent. Johnson defends this, pointing to the length of the new regulatory process and the degree of uncertainty investors face over that period. “Ofgem needs to look at the particular circumstances of this industry,” he says. “Looking that far out brings its own risks to our business. Look at what ENW has done and the risks it has assumed rather than putting on to customers. We’ve assumed that the low-carbon investment is going to be low and we’ll take the risk on that, we’ve put in place many efficiencies within the plan that we have to deliver, and that’s our risk.”
Johnson won’t be drawn on what the change would mean, saying diplomatically: “We look at the entire business in the round. Regardless of where that debate comes out we will sit down with Ofgem and look at the total package, and we’ve got to be comfortable that it delivers for customers in the northwest and all of our stakeholders.”
Does Johnson think that the political row over the cost of energy has caused Ofgem to come down harder on the networks? “No,” he says, not missing a beat. “They have always, in every price review, been rigorous on cost and on efficiency. There’s no ramping up to be done because the politicians are interested; it’s their day job.”
He does concede, however, that the cost of living debate has changed the public attitude to energy companies of all types. This hasn’t necessarily affected how customers view the business, but certainly has changed the media and political approach: “There is a sensitivity about the entire industry, and like it or not, because it’s quite complex, people don’t always see the difference between us and the big six.” Johnson would like to change that: “I would be very happy for us to have a separate item on every bill,” he says. “We are the fourth emergency service, and I want people to know who we are and what we do.”
Network interactions with customers may indeed increase over the next few years – but not necessarily for the right reasons. Like all networks, ENW has had to factor increased callouts arising from the smart meter rollout into its business plan. Johnson says it is too early to say how many of these there could be, although other networks have privately estimated that their callout rate could as much as double.
Johnson was one of many that called for a network-led rollout. Would it still be an option for Decc to put the networks in charge? “Not in the timescale they are talking about,” he says. “I was someone who argued it should have been the DNOs that rolled this out. Street by street would have been the most efficient way to do it. But that wasn’t the route Decc went down, and now the suppliers have very firm plans in place to start the rollout. We aren’t prepared to do that, and if we were asked to, it would take time to prepare.”
The smart meter rollout is just one of the risks networks face. The biggest, thinks Johnson, arises from the eight-year RIIO timeframe. Asked what could go wrong, he replies that ENW has assumed relatively low growth in the low-carbon economy. It is working from Decc’s most conservative estimates on, for example, take-up of electric vehicles and distributed technologies. If there is a greater take-up, perhaps encouraged by government intervention, ENW could have to meet the cost of upgrading its network accordingly. “That’s part of what we deal with as a business,” says Johnson.
Do the low assumptions around low-carbon measures mean that Decc is at risk of not meeting its binding European targets on cutting carbon emissions? Johnson says that all Decc scenarios, including the one ENW is working from, would meet the targets – though concedes this could mean the UK “buying carbon credits which add up to the right sum”.
It is uncertainty, if anything, that keeps Johnson awake at night. “You’ve got Labour talking about the abolition of Ofgem and different structures within the market. All of that may or may not affect the networks businesses. What we need is stability, political and regulatory, because come what may, we have a lot of money to invest in these networks.”
Still more risks sit outside the political and investment framework. The entire utilities industry faces a massive skills shortage. ENW recently opened a skills academy, and has a number of outreach programmes to local schools, encouraging youngsters to take an interest in careers based around science, maths and technology, but Johnson admits it remains a struggle.
ENW’s recruitment of post A-level school leavers is close to Johnson’s heart, as he himself entered the industry at 18, as a trainee with Yorkshire Electricity. He worked his way through the ranks, and is no stranger to storm callouts. After a spell at Norweb, Johnson worked for a number of years at United Utilities, which saw him running its water business in Wales and its contractor business, before being MD of Morrison when it was part of Anglian Water Group. This cross-utility experience is relatively unusual and must come in handy. Are there comparisons to be drawn between water and networks? “They’re very different,” says Johnson. “When the water businesses were privatised, their price review process was RPI+k. It was the time when the European legislation came in about clean beaches, there was vast investment so their revenues were growing. At the same time, electricity distribution businesses were on RPI-x, with massive efficiency challenges. I think the water businesses are now going through that journey as well.”
It’s a strong story, and one that Johnson will no doubt have put to the select committee this week with his usual pleasant charm and cool efficiency. Just as long as they don’t call him one of the big six.