Utility Week

UTILITY WEEK | 6TH - 12TH JULY 2018 | 9 Interview I t's now been three months since Ofgem launched a consultation on its plans for the RIIO2 price con- trols. It stopped taking feedback at the beginning of May and the regulator says it will report back over the summer. One of those more anxious than most to find out whether the regulator is intent on putting the squeeze on the sector is Steven Edwards, chair of the Energy Networks Association's regulation committee. When Utility Week caught up with the Wales & West Utilities director of regulation and commercial he was batting hard for the networks, smarting from a barrage of criticism over excessive profits. Citizens Advice continued its crusade on the issue with the publication of a critical report in June that urged Ofgem to cut network returns by up to £4.1 billion. That's on top of the £5 billion it already expects to shave off over RIIO2. Politicians have been gradually adding their voices to the growing chorus of malcontents. Network companies are certainly set to generate healthy returns over the current RIIO period. The latest annual report from Ofgem showed them all on track to exceed their baseline level. All but one was expected to underspend against their allowance – even Edwards would concede that. The question is: are they earning their profits? Are consumers getting a good deal? Not surprisingly, Edwards says emphatically yes: "Safety is significantly improved over the RIIO period; reliability has improved significantly over the period; investment is flowing through the energy networks; cus- tomer service is significantly improving; and customer bills are actually going down." The soly spoken Welshman says there are not many sectors – even non-regulated ones – that could boast such a track record. Ofgem has acknowledged this "to a degree", he adds. However, the regulator has also expressed concerns that "despite all of that, network returns are too high". These concerns have then been "picked up by politicians and consumer groups". Although Edwards accepts that networks' earnings will be subject to scrutiny, he believes Citizens Advice and others have become narrowly focused on returns, while ignoring the wider context in which they arise: "Of course we understand that there is a question of legiti- macy, and we need to ensure that the returns are earned, but you've got to see the bigger picture here." He says the RIIO framework, which he played a role in developing, has given network operators clear incentives to improve performance and operate efficiently, while penalising those that don't and ensuring customers share in any gains. They have responded to these incentives, investing heavily to deliver a "world-class" service, and have been fairly rewarded for their work. Costs have fallen by 17 per cent since privatisation and consumers are set to save £9 billion over the current price controls. Citizens Advice published a report in July last year claiming the network companies will receive £7.5 billion in "unjustified profits" during the cur- rent price control period. In January, the Energy and Climate Intelligence Unit published a similar report warning that the electricity distribution networks are making returns "beyond most companies' wildest dreams". The reports were seized upon by MPs. Led by John Penrose – a prominent proponent of a price cap on energy tariffs – a group of them wrote to the head of Ofgem to demand action to stop consumers being ripped off. When chief executive Dermot Nolan refused, Penrose called for the regulator to be "scrapped" and replaced with one which "isn't afraid to stick up for consumers properly". Even business and energy secretary Greg Clark jumped on board the bandwagon, telling parliament that distribution network operators (DNOs) had become "fat and lazy" at the expense of their customers. Despite the petition from Penrose et al, Ofgem declined to open a mid- period review of the ED-1 price control. The regulator had considered looking at resetting incentives and reducing spending allowances. This, it concluded, could deliver a net ben- efit to consumers of £322 million during the current settlement period. However, it also warned that the intervention would inflict consider- able damage to investor confidence, raising financing costs by up to £3.1 billion over the following price controls. While it has been unwilling to make changes to the existing settle- ment, Ofgem has made clear that RIIO2 will be less generous to networks. The regulator has initially proposed a substantial reduction in the cost of equity – the baseline rate of return that it considers necessary and sufficient to attract investment. The figure currently ranges from 6 to 7 per cent. Ofgem has suggested lowering the figure to 3 to 5 per cent for RIIO2. It has also floated the idea of introducing "failsafe mechanisms" to prevent profits from exceeding expectations. The regulator said its proposals would likely save consumers £5 billion. But this was not enough to satisfy Citizens Advice, which in June pub- lished another report urging Ofgem to go even further. The charity said Ofgem should look at cutting network returns by up to £4.1 billion more. The battle for RIIO2

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