Utility Week

UTILITY WEEK | APRIL 2021 | 17 Policy & Regulation an initial figure of 1 per cent and then applied a 0.2 per cent upli for the impact of innovation pro- jects in GD1. All the GDNs are appealing against the innova- tion upli (which is redolent of the so-called smart grids benefit that Ofgem lost on at ED1) but in addition some are citing other errors in Ofgem's calculation. At the end of the day SGN has made clear it would settle for the 1 per cent it put in its business plan; WWU continues to argue for the 0.5 per cent it included in its plan. The CMA could in theory come up with a differ- ent efficiency target for different companies if it accepted some of the arguments made by WWU that others have not made – but that would feel like a slightly odd result. The second additional theme is the extent of change that Ofgem can make dur- ing the price control period in ways that leave the companies without their statutory right of appeal to the CMA. Ofgem has made "adaptive regulation" a cornerstone of its approach to RIIO2, to cope with the uncer- tainty around net zero and more broadly, but in doing so has arguably undermined the appeal rights of companies. SSEN and Scottish Power have highlighted in particu- lar the LOTI funding for large investments (to be agreed in period), as well the large num- ber of reopeners where Ofgem can simply direct changes. WWU has focused on the proliferation of associated documents that it is required to comply with, and which again Ofgem can change without going through the full licence change process. I have some sympathy with these arguments. If government has decided there should be a right of appeal, then the regu- lator circumventing that by the way it does things doesn't feel right, especially where there could be significant financial impacts. However, SONI made a simi- lar argument in 2017 but lost on the basis that it still had the option of judicial review. The question is whether what Ofgem has done is "wrong" or just poor regulatory practice. No doubt companies will be raising their concerns with policy makers as well as through the appeal route. But faced with the current deluge of appeals it's not clear that Ofgem (or government) will be very receptive to the idea of extending these rights. Finally, there is a list of com- pany-specific gripes. For the most part these relate to claims that Ofgem has not allowed sufficient totex funding in par- ticular areas, based on quite technical arguments about Ofgem's modelling. SGN focuses on the efficiency adjustment and the choice of the 85th percentile as the efficiency benchmark as well as details of how it is applied. Cadent raises the inclusion of LTS diversions in the bench- marking model (which disad- vantages the company) and the lack of sufficient regional adjust- ment for the costs of its London network. NGN highlights the BPI mechanism and the failure to reward them as a frontier com- pany (as well as the use of the 85th percentile). WWU, which has the long- est list of complaints, picks up on the cost of debt (and the use of average rather than company-specific rates), the repex allowance (compared to the initial tenders it has run) and a tax clawback mechanism (and how derivatives are treated within that). Finally, SSEN picks up a spe- cific point around the transfer of cashflow risk on TNUOS from the ESO to them. All of these points will have to be considered on their indi- vidual merits. In some cases they are points of principal on Ofgem's side, in others one sus- pects that Ofgem simply ran out of time. A mountain of evidence The appeal documents from the companies vary in length , with Scottish Power the shortest at 42 pages and WWU the longest at 186. A total of just over 1,000 pages. And in each case the appeal documents are supported by half a dozen expert reports from the consultancies, witness statements and other evidence. "Companies may that reliability their will different under reformed abstraction system" The CMA is used to managing lorry loads of information but trying to digest it enough to work out how to structure the appeals is a formidable task. Ofgem too will presumably be struggling with how to handle this volume in a world of homeworking. Linked to the length of their documents, the companies also vary in how clearly they spell out the specific "errors" of fact or law that constitute the basis for their appeal. That is essential for the CMA to tease out what exactly it has to decide. To address all of this the CMA may well request skeleton argu- ments from each of the parties where they have to boil down exactly what their argument is into a few pages. However, one feature of these focused appeals is that such procedural steps are not visible to the outside world, which sits oddly in the context of a RIIO process where stake- holder engagement was so cen- tral throughout. In ED1 the appeals were clearly seen by the CMA as bilat- eral disputes between the com- pany and Ofgem – not part of a wider policy landscape. On some aspects, of course, the CMA's hands are tied by the legal frame- work. However, there are still things it could do to make the process more transparent, coher- ent and to avoid some of the potentially perverse outcomes identified above. Wider stake- holders need to be assured that the appeal regime strengthens rather than undermines the regu- latory process. This is not simply a set of bilateral disputes (which might also involve a tightly defined set of interested parties) – we all have a stake in the outcome. Maxine Frerk spent 15 years at Ofgem, latterly taking on responsibility for all aspects of the regulation of distribution networks. Since leaving Ofgem she has been working as an independent consultant for a mix of regulated company and consumer/community group clients. The CMA will have piles of evidence to sift through as it assesses each appeal on its legal merits

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