The Competition and Markets Authority (CMA) has today published its final determinations on its inquiry into Ofgem’s RIIO-ED1 price control framework for five of the distribution network operators (DNOs).
The outcome has seen Centrica subsidiary British Gas trounced, having achieved a meagre reduction in DNO revenue through charges of £105 million over the entire ED1 period. As UK Power Networks points out, this revenue adjustment per company is proportional to the number of distinct networks it operates, so is unlikely to have much of an effect.
British Gas is looking on the bright side, insisting that it is pleased to have “secured a £105 million saving for UK energy customers”. But the modest victory came at a price for the big six supplier, which has been ordered to pay 80 per cent of the costs incurred by the CMA, and 60 per cent of Ofgem’s costs in connection with the appeal.
Northern Powergrid secured a minor victory of an increase of £11 million in its allowable revenue over ED1 – an amount also unlikely to impact the company’s operations much when divided over eight years.
British Gas referred Ofgem’s price settlement to the CMA in March this year, amid growing pressure on suppliers to reduce the costs they pass on to consumers. At the same time Northern Powergrid sought permission to appeal against its RIIO-ED1 settlement on the grounds that the price control is too tough.
The Authority has dismissed four of the five grounds of appeal brought forward by British Gas but has upheld one. It also dismissed two of three grounds of appeal by Northern Powergrid but upheld one relating to Ofgem’s adjustments to reflect potential savings through smart grids and technological innovations.
Here’s how the industry reacted to the final determinations of the CMA on its price control probe:
Ofgem spokesperson
“Ofgem today welcomes the Competition and Markets Authority’s decision on appeals made by two companies against specific elements of the 2015-2023 electricity distribution price control (RIIO ED1).
“The CMA found partially in favour of British Gas on one ground, but dismissed the other four grounds in Ofgem’s favour. For Northern Powergrid, CMA found in favour on one ground, but dismissed the other two.
“Ofgem will examine the CMA’s decision in more detail, looking to learn lessons and improve its processes for future price controls.”
British Gas spokesperson
“Our appeal to the CMA over the price controls for electricity distribution network operators has secured a £105 million saving for UK energy customers. We welcome the decision and will continue to seek ways to work with Ofgem and the industry to achieve the best value for our customers.”
Northern Powergrid regulation director John France
“We’re pleased that the CMA has agreed with us that Ofgem was wrong about smart grid benefits. We didn’t take the decision to appeal the price control lightly, but an important principle was at stake and the appeal process exists to get errors like this corrected.
“We accept that regulators must be allowed the discretion to make reasonable judgements. But we were sure that the decision on smart grid savings went well beyond that and so we had to appeal it. We expect to have to spend every penny of the money that the CMA has reinstated in order to deliver what we have committed to do for our customers.”
UK Power Networks spokesperson
“We welcome the CMA’s decision in terms of ratifying the overall RIIO-ED1 price control which is in excess of £28 billion over the next eight years. This enables us now to focus on continuing to deliver excellent value for our customers, running reliable electricity networks and investing to maintain and upgrade them, while innovating to ensure smart low carbon technologies are delivered.
“We acknowledge the outcome of the Northern Powergrid’s appeal where it has been successful on one of its three grounds of appeal, and we now look forward to discussing with Ofgem how this error (that applies to all affected slow-track companies) should be reflected. We believe that when the two errors are combined this would eliminate the British Gas adjustment.”
SSE managing director for networks Colin Nicol
“We welcome the conclusion of this appeal process and in particular the validation of the RIIO-ED1 price control process as representing value for money for customers. As we stated in December 2014 when accepting the price control settlement, we remain committed to delivering improved network performance and customer service over the price control period while also providing a fair return to investors. The conclusion of the appeal process will allow us to focus on doing just that.”
Citizens Advice head of energy Audrey Gallacher
“Networks need to show they are providing value for money. These charges account for a substantial part of consumers’ energy bills. We have expressed concerns that network agreements are complicated and opaque, meaning it’s hard for customers to know if they’re getting a good deal and the companies are delivering what they’ve promised. Regulatory deals have been over-generous to the networks in the past, allowing them to earn high returns for a very low-risk monopoly business.
“We’re pleased the CMA has picked up on some of these issues in its decisions, and delivered close to £100 million in net savings for consumers over the next eight years.”