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UTILITY WEEK | OCTOBER 2020 | 25 Policy & Regulation The draft proposals don't do much to support Ogem's move to 'adaptive regulation'. A s Ofgem's RIIO2 dra determinations have sunk in and having ploughed through the electricity distribu- tion sector specific methodology consultation, I think I'm starting to see what Ofgem is trying to do. But it still needs a lot more thought. With net zero having risen up Ofgem's agenda and acknowledging the uncertainty about the pathway for getting there, Ofgem has decided it needs to do network regulation differently. This was initially set out in the Decarbonisation Action Plan, launched on Jonathan Brearley's first day as CEO where Ofgem said: "We will make the network price control regime more adaptive to deliver the most effective transition at low- est cost." At the time, I skimmed over those words – making the regime more adaptive is one of those motherhood and apple pie statements that you can't disagree with. But it turns out this was Ofgem's big idea. The problem is that there has not been a clear articulation of what this means. Wind back three years and you can find Jonathan, new in Ofgem, talking about his view that Ofgem needed to be more adaptable and respond more quickly. He drew a contrast between the public policy world, where you take ages to design something but you really strive to get it right, and the private sector, which would tend to set something up and then adapt it as it goes along or even drop it if it doesn't work. He suggested Ofgem might need to become more like the private sector. He said Ofgem hadn't yet worked out how to be more flexible. The worry is that three years on, it still hasn't worked it out and its proposals for RIIO2 actually cut across the adaptive way that Jonathan observes the private sector itself would want to work to cope with uncertainty. Back then to RIIO2 and the dra determinations, where Ofgem's big idea was in essence to move a large slug of the money that would historically have been given as an upfront revenue allowance into an uncertainty mechanism to be dished out during the price con- trol as the need becomes clearer. Probably the best articulation of its thinking is in the investor briefing it gave, which high- lighted a deliberate shi to put more into uncertainty mecha- nisms but tried to paint a picture that this could mean more money ultimately for companies given the criticality of net zero. What worries everyone is that this emphasis on uncertainty mechanisms relies on Ofgem making quick decisions if we are to avoid delays to investment. Ofgem acknowledged that, but apart from reiterating that it will need to be more agile, it has said nothing about how it will achieve that in practice. And it's not just about culture change; there are legal steps that have to be gone through and a need for engagement and consultation, which all take time. There is also an implicit assumption that as time moves forward the need for investment will become more certain. Some things will become clearer, but given the timescales for infrastructure investment there will always be uncertainty and Ofgem is going to have to deal with that. Read Maxine's further thoughts on how "adaptive regulation" can be applied in practice and the impact of the electricity distribu- tion companies. https://utility- week.co.uk/riio2-a-big-idea/ Comment Maxine Frerk former Ofgem executive OUTPUTS Under the new Business Plan Incentive, companies will be required to deliver three main types of outputs: • Licence Obligations • Price Control Deliverables • Outcome Delivery Incentives (ODIs) There are upper and lower limits on the total rewards and penalties associated with ODIs set at the following rates for each sector as a percentage of their Return on Regulatory Equity (RoRE): • Electricity transmission – minus 1.1 per cent to plus 0.2 per cent • Gas transmission – minus 0.7 per cent to plus 0.6 per cent • Gas distribution – minus 0.8 per cent to plus 0.4 per cent Ofgem is also introducing a new Return Adjustment Mechanism, whereby any RoRE more than 3 per cent above or below the baseline will be cut in half. Read more on how Ofgem's approach to the price controls for electricity distribution companies is shaping up, p8 Keep up to date with the latest developments in RIIO2 on our dedicated page https://utilityweek.co.uk/tag/riio2/ PENALTIES £140m – Penalties imposed on gas and electricity networks, with all but two companies affected Company Maximum BPI Proposed BPI Proposed reward/penalty reward/penalty sharing factor SPT £19.4m -£15m 39.1% SHET £32.2m -£32.2m 30.9% NGET £66.6m -£66.6m 39.2% NGGT £31.8m -£26.4m 36.6% Cadent £85.4m -£0.1m 49.7% NGN £22.7m £1.6m 50.0% SGN £53.2m -£1.1m 49.4% WWU £21m £0m 49.6%