Utility Week

UTILITY WEEK | JANUARY 2021 | 9 …and what they mean and to legislate "when Parliamentary time allows" to enable competition in the build- ing, ownership and operation of the onshore electricity network, as well as to define elec- tricity storage in law. What they said Matthew Cole, chair of trustees at charity Fuel Bank Foundation (responding to the opt-in switching proposals): "It's important that families are on a tariff that meets their needs, and that they can afford, and I do worry that somebody 'choosing' a tariff for you could have the unintended consequence of people becoming less engaged in energy." Chris Bennett, director at National Grid (on competition in onshore networks): "The scale of projects we have in the pipeline is unprecedented, and as it stands we have no sight of whether we will be the ones to deliver them. We are keen for government to now bring forward the legislation necessary to deliver CATO (Competitively Appointed Transmission Owner) as soon as possible." What this means Analysts from Barclays summed up the white paper well with "there is an awful lot in this 170-page document, and yet very little clar- ity". They go on to point out that the docu- ment references "competition" 84 times, "regulation" on 82 occasions but "consulta- tion" crops up a whopping 115 times. This is pretty much par for the course with white papers, which are designed to be overarch- ing policy frameworks rather than detailed roadmaps. However, Boris Johnson appeared to have cherry-picked the best lines for his 10 points, leaving the white paper as essentially a calendar of further work for 2021. What to look out for Despite this slight sense of a Christmas pre- sent that turns out to be socks rather than scotch, the white paper does make some hugely important commitments. These will be advanced in a series of papers and con- sultations next year. These are too numerous to list here but include specific papers on hydrogen, heat and storage as well as updates to the Gas Act. Consultations are promised on every- thing from energy efficiency to the role of Ofgem, the future of the energy retail market and biomass. Unpublished as Utility Week went to press but promised in December is an interim report on the how the transition to net zero will be funded. This conversation will under- pin every other element of the paper and cannot come soon enough. the regulator's backtracking in several areas as evidence of how off-track the draœ deter- minations were. The rate of returns remains the most high-profile sticking point. Ofgem has been at pains to point out that the CMA stance on PR19 is exclusive to the water sector and that its decisions have yet to be finalised. However, it has then used the CMA's work to inform its approach to the debt beta and overall has taken the position that energy networks are slightly riskier than water companies. It has leœ networks frus- trated, then, that overall the water compa- nies who have appealed to the CMA seem set to end up with overall higher rates of returns than is allowed under RIIO2. What to look out for The big question now is whether compa- nies will go to the CMA. Unlike with PR19 they will be able to appeal specific elements of the determination. The cost of capital remains the most likely area for challenges. Given that it is a concern shared across the sector, is there the potential for joint appeals – perhaps on a specific element of the cost of capital? This approach would certainly cut down on management time and the individual company costs as the job of mounting a case could essentially be outsourced. A united front would also be powerful. If companies want to base their appeal on PR19, they will be cutting it fine, with the CMA not expecting to issue its final redeter- minations until mid-February and the dead- line for RIIO2 appeals in March. Ofgem's movement on returns could also impact on Ofwat's case, having implic- itly accepted some elements of the CMA's methodology. prosecution last year by the Environment Agency and a record fine from Ofwat have meant the company has been in the head- lines for all the wrong reasons. What they said Susan Davy, Pennon chief executive: "We are looking at opportunities and completing the process of assessing these. We are bench- marking against return of capital to share- holders. As a group we are performing well on our plans and making sure the market can see how well we are doing." What this means Pennon has £2.9 billion to invest aœer paying down debt and into the company's pension plan and has ruled out buying a minority stake in a rival water company because that wouldn't allow it to make the operational changes it would want to. It bought Bourne- mouth Water in 2015 for £100 million and has proved that a common border is not nec- essary for success, although geographically closer targets may make more sense from a resource sharing perspective. It is notable that the listed company made no comment on the high-profile speculation about a pursuit of Southern. Could this indi- cate a wider deal is in the offing? For Southern's investors, an approach would seem welcome. The current backers, who acquired the company in 2007 for £4.2 billion, have been supportive but now face much reduced returns and know Southern is still in the midst of a long turnaround. Chief executive Ian MacAulay has made inroads to improvement since joining in 2017 but would need more time, money and, cru- cially, more luck to turn the ship around. What to look out for Pennon will be under pressure to provide an update at the next trading statement, due in March. Investors will be watching keenly but the company will not rush into a deal. Even if an approach was made, it would be far from a done deal. The CMA would need to approve any acquisition. However, as companies become ever closer in perfor- mance terms, comparative competition may no longer be seen as vital, so the CMA could move in favour of the merger, depending on the benefits offered for customers. Fair returns: the Wacc remains the most contentious issue Stay abreast of all the news, all of the time: www.utilityweek.co.uk

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