Utility Week

UTILITY WEEK | 21ST - 27TH SEPTEMBER 2018 | 13 Policy & Regulation The two sectors with greater confidence in their regulators are gas networks and power networks, and this acceptance is mirrored in their response to new frameworks com- ing down the tracks. Chief executives in the power and gas sectors were asked about the RIIO2 price control framework and period, and views were largely aligned. They were broadly supportive of Ofgem's initial framework plans, when asked if the plans appropriately reflect the changes and challenges facing UK energy networks. This is in contrast to the general disgruntlement among water companies, all of whom have now submitted business plans in prepara- tion for PR19. Despite the slight decline since last year, it's clear that business model change is something all chief executives see as neces- sary and inevitable as utilities evolve to meet growing consumer expectations and a low carbon future in both energy and transport. The sector is strapping itself in for the ride. Key findings include: • Two-thirds (64 per cent) of chief execu- tives say regulation is not fit for purpose, up from 57 per cent last year. The figure leaps to 100 per cent among energy retail- ers, energy generators and non-domestic water retailers, and to 75 per cent among domestic water wholesalers. • Chief executives increasingly look to the economy rather than the government for stability (confidence is up from 4.7 to 5.8) – though concerns about Brexit and the impact it will have on business have also grown. • Energy retailers of all sizes agreed that the smart meter rollout is putting unsus- tainable pressure on their business. • Chief executives in the power and gas sec- tors were broadly supportive of Ofgem's initial framework plans for the RIIO2 price control framework and period. But they don't believe their investors are will- ing to accept lower returns in the next price control period. Regulators 'out of touch' Regulators are increasingly out of touch with their sectors . Nearly two-thirds (64 per cent) of chief executives across the utilities spec- trum say their regulatory regime is not fit for purpose, up from 57 per cent last year. The figure leaps to 100 per cent among energy retailers, energy generators and non- domestic water retailers, and to 75 per cent among domestic water wholesalers. The two sectors with greater confidence in their regulators are gas networks (where 80 per cent believe they are fit for purpose) and power networks (71 per cent). A number of the chief executives who spoke to Utility Week to comment on the find- ings had a certain sympathy with their regu- lators, on the basis that they are "damned if they do and damned if they don't". However, one chief executive from the generation side, who prefers to be unnamed, was more critical, raising an issue that has been bubbling away for some time: "Regu- lation has not kept pace with the growth in distributed connected generation and behind-the-meter generation when it comes to market transparency. Distinction in the regulatory arrangements between large plant that connected to the transmission system and smaller distributed connected plant is becoming increasingly artificial." He added: "We support the market frame- work – the energy wholesale, flexibility, and capacity markets. The framework is good, but market distortions are currently skewing signals to investors. They make it less attrac- tive to invest in baseload-capable gas plant, which will continue to be needed to support a sustainable energy system in the future." Water Questioned about PR19, Ofwat's price meth- odology proposals for the 2020-25 regulatory period, water wholesaler chief executives were uniformly critical of every aspect of the proposals. Asked if Ofwat's proposals for reforming dividend policy are fair and proportionate, 25 per cent disagreed strongly and 50 per cent disagreed somewhat. The other 25 per cent have yet to make up their minds. When questioned if Ofwat's structure for classifying company business plans provides a robust framework for incentivising high quality business planning and penalising low quality business planning for the next asset management plan (AMP) period, 50 per cent disagreed somewhat and 50 per cent reserved judgement. Remarking on the findings, Colin Skel- lett, chief executive of Wessex Water, did not think the regulatory regime was unfit for pur- pose but warned that the current direction of travel may present problems for the sector. "We've seen regulation go from setting out a few high-level performance standards that companies must meet into a more intru- sive model, with almost 40 KPIs related to rewards and penalties. As it becomes more intrusive, there is a danger of there being unintended consequences," he said. In relation to the regulator's approach to bringing competition into elements of the wholesale value chain, he said Ofwat's approach to the market for biosolids was "a step in the right direction". "Water retail is almost designed to exclude new entrants" "Too intrusive, drives wrong behaviours, needs more radical approach" "The current regime is successful for cost, price and service discovery but it does not enable effective development and delivery of infrastructure and services to meet medium and long- term strategic needs or enable multi-infrastructure challenges and opportunities to be identified or enabled" "Regulator doesn't understand competition" "Not focused on retailer needs, all about wholesalers" "Too much political interference and a lack of forward thinking about investment required to modernise the economy" Why do you think the regulatory regime is not fit for purpose? (individual sectors undisclosed): The findings of this exclusive and compre- hensive survey of chief executives across the utilities field, together with interviews of industry leaders about the findings, is avail- able as premium content on utilityweek.co.uk

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