Utility Week

8 | 8TH - 14TH MARCH 2019 | UTILITY WEEK A UtilityWeek c ampaign bedrock of regulatory certainty has to be predictability and clarity of the regulatory process." The risk is that lower investment could suppress innovation that would otherwise benefit tomorrow's customers and drive down future bills, the GIIA's Thompson said: "While Ofgem observes the need for potentially radical changes, regulators have already created the conditions that are nec- essary for greater innovation. The system has basically delivered," he said, pointing to how Ofgem's RIIO1 and Ofwat's PR14 price control frameworks had both helped to deliver con- siderable innovation on the electricity and water networks, respectively. Long-term consequences This isn't just about protecting investors' pockets. A drying up of investment risks hitting the consumers of the future, Ed Gill, head of public affairs at the Energy Networks Association tells Utility Week. The short-term price concerns of today's customers must to be balanced with the investment requirements required to meet longer-term challenges, he argues. "We want to make sure they are balanced so we are not just focusing on short-term interests in a way that compromises our abil- ity to deliver in the long term," said Gill Decisions that may protect consumers now should not jeopardise work on upgrad- ing infrastructure, he said. "We don't want to get into a situation years down the line where we cannot be as flexible as we would like to serve customers. If you go for too low a rate of return, then businesses will do the least risky and the most vanilla things." Consumers clearly want bills to be as low as possible, he acknowledges. But they also want other things, which can ultimately only be delivered if adequate levels of investment are permitted in the network infrastructure. This includes charging points for the electric vehicles that will help to curb the air pollu- tion that is such a growing cause of concern across the developed world. Another example the replacement of old- fashioned iron gas pipes with plastic alterna- tives, which will be capable of transporting lower carbon hydrogen in the future. Gill says: "We need to recognise that the public interest is not just the short-term cost but the long term." Anglian Water's head of policy and regu- latory strategy Darren Rice agreed: "Lowest cost is not the same as best value, and we need regulatory mechanisms that enable the best value choices." As an example of the risks of this regula- tory creep, Energy UK's Gallacher pointed to the Treasury's recently published consulta- tion on how regulators can foster innovation. "Economic regulators should do things to foster competition and protect consumers," she said. "The worry is that added complica- tions have led to confused decision making." And there is a limit to what regulation can be expected to deliver, said Anglian's Rice. "There is a danger of peak regulation with a plethora of different price controls and tools. There is a risk of not seeing the wood for the trees," he said. The NIC review should be a structural rather than a "bolt on" exercise, said Ofgem's Perkins. Avoiding price spikes Regulators and policymakers can also help by avoiding unnecessarily tight deadlines for infrastructure upgrades, which can in turn fuel spikes in prices, said CCWater's Smith, who points to the introduction of the Urban Waste Water Directive "It doesn't help getting customers on side when it causes very spiky price increases. Government and regulators can play a part by not creating a situation of a very large programme with very tight time frames. – "Customers generally view things like maintenance – and even environmental spending – as good stuff. As long as you do it in such a way that it doesn't cause price spikes, you can keep people on board." Meanwhile, a report published this week by Sustainability First recommends that rather than a straitjacket based on one-size- fits all regulatory periods, utilities' different activities should be subject to varying time scales. The price control periods for energy net- work and water companies can create invest- ment horizons that are too short to tackle some of the bigger environmental chal- lenges facing utilities, says Sustainability First's Darcy. "The cyclical regulatory system encourages short-termism and underinvest- ment for the future." However, the report's prescription is not more regulation. Rather than wait for the approval of regulators, in some areas of activ- ity companies need to be more proactive, she says. "We need to look at the risk and get the appropriate time period rather than having time cycles that may be too short for some things and too long for others. To lump eve- rything into the same cycle is nuts "Lots of companies are taking the talk on social contract, the key thing is who is walk- ing the walk and embedding it into the busi- ness so it really drives the business purpose and everything they do." "Retail energy markets must work well for most people, including those in vulnerable circumstances, not just for a savvy few." Mary Stark, executive director of the consumers and markets directorate, Ofgem "We want to make sure we are not focusing on short- term interests in a way that compromises our ability to deliver in the long term." Ed Gill, head of public affairs, ENA "Lowest cost is not the same as best value, and we need regulatory mechanisms that enable the best value choices." Darren Rice, head of policy and regulatory strategy, Anglian Water "Economic regulators should do things to foster competition and protect consumers. The worry is that added complications have led to confused decision making." Audrey Gallacher, policy director, Energy UK "The model we have is over 30 years old and is due an overhaul anyway: current challenges make that more pressing." Sharon Darcy, director, Sustainability First "We need to recognise that there is a trade-off when developing regulatory models." Ian Thompson, senior consultant, Economic Insight Analysis continued from previous page

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