Electricity network profits may be subjected to increased scrutiny as part of a possible mid-period review of the RIIO ED-1 price control, Ofgem has revealed.
The regulator has launched a consultation on whether or not to conduct a review and, if so, what issues it should cover.
The consultation was first announced back in June, when Ofgem confirmed the timetable for the process.
The decision document stated the review would be limited to covering “material changes to existing outputs that can be justified by clear changes in government policy” and the introduction of new outputs that may be required to meet the needs of consumers and other networks users. It warned the process was not intended to provide an opportunity to conduct “a mini price review”.
However, Ofgem said it is now considering expanding the remit to include issues relating to “financial and incentive performance and design”.
The consultation was launched following the completion of a call for evidence which the regulator began in July. Although the majority of respondents agreed with the scope of the review as laid out in Ofgem’s strategy decision, British Gas argued the process should involve a “comprehensive review of all aspects of the price control”.
The supplier said the performance of distribution network operators (DNOs) and the underlying drivers should be assessed to ensure the legitimacy of returns, noting that returns on regulatory equity are forecast to average around nine per cent over the eight-year period, compared to a baseline of six per cent (or 6.4 per cent for Western Power Distribution).
“For example, the underlying reasons why DNOs expect to under-spend expenditure allowances by £837 million (three per cent), relatively soon after business plan submissions (following the first year of the price control), should be investigated and reviewed,” the company said.
Citizens Advice similarly raised concerns that deficiencies in the design of the price control could result in consumers bearing the costs of “significant excess profits that are entirely unjustified, unreflective of performance and in excess of what is required to stimulate investment in the sector.
The charity complained the proposed limits on what issues would be examined by the review were “inconsistent with Ofgem’s past decisions on re-opening electricity distribution price controls.”
Ofgem said any short-term benefits from widening the scope of the review must be “weighed up against the longer-term risks of undermining the stability of the regulatory regime, including potential higher costs in the longer term.”
According to the consultation document, the regulator is also considering a more limited expansion of the review to include policy-driven impacts on “discrete projects” which are not formally considered as outputs. This was prompted by responses to the call for evidence which highlighted the scaling back of rail electrification plans by the government.
When it came to issues already covered by the proposed remit, the responses drew attention to a number of changes to energy policy, for example concerning electric vehicles, flood resilience and black start capabilities, which stakeholders argued would impact existing outputs.
However, Ofgem said none of these changes justified a mid-period review or should fall within its purview.
Stakeholders also suggested the creation of several new outputs relating to the smart meter rollout and the transformation of DNOs into distribution system operators (DSOs). Again, Ofgem said neither of these issues should be considered by the review.
A spokesman for the Energy Networks Association (ENA) commented: “ENA is currently consulting with our members on the detail of the consultation and we look forward to responding to it in due course.”
Ofgem plans to decide in spring 2018 whether or not to initiate a mid-period review.