Utility Week

UTILITY WEEK | 7TH - 13TH FEBRUARY 2020 | 11 Policy & Regulation This week Ofgem errors will cost customers £800m NAO says regulator set cost of equity too high for the first set of electricity network price controls Ofgem's failure to use up-to-date evidence when determining electricity network returns for the first set of RIIO price controls is expected to cost consumers £800 million, according to a new report from the National Audit Office (NAO). The watchdog says network operators' spending allowances are also too generous and their performance targets too lax. It has urged the regulator to improve its evidence gathering for future decisions. The report says electricity network returns are cur- rently forecast to average 9.2 per cent over the full eight- year settlement period. This is towards the high end of Ofgem's anticipated range of 2.5 per cent to 10.5 per cent, which it only expected to be reached by the best performing companies. Despite regulated utilities being considered less risky by investors, it is also higher than Ofgem's estimate of the average return for a FTSE-listed company of 5.35 per cent to 5.75 per cent. The NAO says this is partly the result of Ofgem setting the cost of equity – the baseline profit margin for share- holders – too high. "In our assessment, Ofgem erred in placing too much weight on consistency with previous regulatory decisions when it set the baseline rate of return, and not enough weight on the most up-to-date market evidence, which suggested network company risk was lower. "We estimate that if Ofgem had placed greater weight on this evidence, consumers could have paid at least £800 million less." TG ENERGY BSC panel able to act faster if suppliers are at risk of failure The Balancing Settlement Code (BSC) panel will be able to take faster action if a supplier is at risk of failure and apply more stringent operating restrictions under an amendment to the BSC due to take effect on 27 February. The modification P385 was proposed a™er a rise in defaults and the amount of unpaid charges le™ to be recovered from other companies still operating. The panel already has the ability to suspend a party's right to trade, receive data or register new meters or balancing mecha- nism units. It can also expel them from the BSC or recom- mend a block on them taking on new supply customers. These powers can currently be activated in seven scenarios, each referred to as an "event of default". All involve the failure of a party to either maintain sufficient credit cover for its outstanding trading charges, including imbalance charges (credit default), or pay the BSC charges used to cover the costs of operating the code (payment default). P385 will introduce two new scenarios and make changes to several existing ones, including removing some parameters from the BSC and leaving them at the discretion of the panel. The new events will be trig- gered if a party's credit cover is used to pay trading charges on three or more occasions within a 30-day period, or if it publicly announces it is ceasing to trade. In the case of the latter, the panel is currently unable to act until the company explicitly admits to code administrator Elexon that it will be unable to pay its debts. • Failed energy suppliers le™ the market owing the Energy Ombudsman £1.67 million (£1.39 million excluding VAT) in 2019, resulting in the service shi™ing costs onto other retailers. WATER UU accepts Ofwat final determination United Utilities (UU) has become the second water company to accept Ofwat's final determina- tion on its business plan for the next five years. Like Severn Trent, which also announced its acceptance last week, United Utilities was fast- tracked through the price control process. But the final determina- tion revealed a rise in the level of bill reductions the company must achieve by 2025, while the totex allowance was still £146.7 million lower than the company had originally requested. UU chief executive Steve Mogford said: "The final deter- mination delivers the third suc- cessive five-year period in which customer bills have reduced." Too high: cost of equity set by Ofgem Political Agenda David Blackman "Prime ministerial input will be crucial for COP 26" Preparations for the COP 26 summit, due to take place in Glasgow in November, are not going to plan, to put it mildly. A date has been fixed but the venue has yet to be sorted out. The shambolic state of prepa- rations was laid bare following former energy minister Claire Perry O'Neill's sacking as sum- mit president. In a letter to Boris Johnson, she vented her frustra- tion about the lack of focus and resources devoted so far to what will be the biggest ever inter- However, one of the key lessons from previous summits is that prime ministerial input will be crucial. Perry O'Neill's comments that Johnson didn't really "get" climate change won't inspire confidence that he will treat the event with the serious- ness it merits, particularly when his political priority will be con- cluding a trade deal with the EU. The PM gained a reputation in his journalistic career for wing- ing deadlines. But an event as large as COP 26 can't be busked. governmental conference hosted by the UK. Perry O'Neill is committed to tackling climate change, but may not have been the right person for the job. Previous presidents have tended to be heavy-hitting politicians, such as Laurent Fabius, who oversaw preparations for the Paris 2015 summit while serving as French minister of foreign affairs. The government had yet to announce who will take over from Perry O'Neill as Utility Week went to press. The task of identifying the right minister to take over will be complicated by the impending reshuffle, already delayed until a™er Brexit day.

• Cover