Utility Week

UTILITY WEEK | APRIL 2021 | 9 …and what they mean baddie in town. But more worrying than that there's almost a behaviour where the regula- tor says 'we'll give you a bunch of numbers and if you don't like it, go to the CMA and they'll sort it'." What this means Starting with water – Ofwat reacted furi- ously to the CMA's preliminary redetermina- tion, which it believed had been rushed and failed to take account of the consequences of loosening the leash on cost of capital. This lobbying appears to have done the trick. As former Ofgem chief executive Dermot Nolan told Utility Week's Investor Summit "Ofwat threw its toys out of the pram and the CMA reacted." While the final determination dif- fered from Ofwat's verdict in several regards, the differences don't seem fundamental enough to warrant a legal challenge from the regulator. Likewise, the companies seem rel- atively happy with their lot. The dra‰ rede- termination was better than they could have dreamt, certainly on cost of capital. The final take is probably what they were hoping for at the outset. But it has been a gruelling and acrimo- nious journey to this point. The appeals process has taken more than a full year and sucked up huge amounts of resources – both time and money. The energy appellants now face the same prospect. What to look out for Given the obvious toll the appeals took on the water sector, and with the CMA having given clarity on what it considers a fair rate of return, could we see some of the appeals in energy now dri‰ away? Barclays analyst Dominic Nash, who predicted the clean sweep of appeals to RIIO2, described them as a "low-risk option" for the companies, given their right to retract and that, unlike in water, they are able to appeal specific ele- ments of the determination. Key to all the energy appeals is that their sector is higher risk than water and so mer- its higher returns. And despite the turmoil of the past year, the water appellants have managed to nudge up returns. It seems likely that their energy counterparts will still see this as a battle worth waging. The wider context is the regulatory frame- work itself and whether it remains fit for purpose in the context of the urgent need to decarbonise. The debate increasingly descends into a binary argument of ben- efits to investors vs benefit to customers. To achieve net zero, clearly both need to be aligned. comes in the middle of a wider debate on returns to investors, it is especially pertinent. The company's decision to exit gas is also likely to spark much debate. Pettigrew was careful to stress that this is not a total retreat from the sector and that it will continue to explore optionality for gas transmission in areas like hydrogen and renewable natural gas. This process will not start immediately and there is a chance the government will have given clearer signals by that point as to what role the gas grid will play in the future. This will clearly dictate the level of inter- est and price paid. Could Cadent's major- ity backers (including Macquarie, another rumoured bidder for WPD) be tempted to get the band back together with a bid to merge the transmission and distribution arms once again? "We know from looking at complaints that suppliers can sometimes take too long to issue refunds, which can be stressful for consumers." Doug Stewart, chief executive of Green Energy UK: "This should herald the end of payment in advance for many customers in the UK. Looking ahead, it will provide house- holds and the UK economy a much-needed boost: £1.4 billion is not to be sniffed at." What this means The roots of this proposal go back several years to the influx of smaller players enter- ing the energy retail market. While this paved the way for disruptor brands that have transformed the sector and grown into genu- ine challengers to the incumbents, it also unleashed a swathe of operators aiming to grow market share through unsustainably low prices. Ofgem has been trying to close this particular stable door ever since. This sharp practice has come in many forms but the problem Ofgem is trying to tackle here is the practice of setting high direct debits in order to create the cash flow for what the regulator describes as "risky strategies", including unsustainably low prices. However, as with all well-intentioned proposals, might there be unintended conse- quences? Fuel poverty experts have warned that we are already facing an uncertain land- scape on household incomes and in some cases this proposal could lead to more debt piling up over winter. It has been suggested that there should be an option to carry the credit forward to reduce monthly payments. What to look out for So far, there has been little public reaction from suppliers but it is clear this will have a significant impact on all businesses in the market. It will be interesting to see what responses come through to the consultation, which closes in May. Already, though, there have been accusa- tions that Ofgem is failing to attack the root causes of a "broken" energy retail market, in which few companies are making a profit and arguably need the backstop of customer accounts being in credit in order to buy energy in advance. As with the automatic switching proposals in the Energy White Paper, there is a concern within the industry that regulator and government are aiming for catchy headlines about empowering con- sumers rather than tackling the real issues. National Grid is getting rid of gas to concentrate on electricity What to look out for All the different strands of this deal will be keeping Utility Week busy for months, pos- sibly years, to come. The sale of National Grid Gas is expected to start this year and be completed approxi- mately a year later. For National Grid this will be the start of a process of choosing its words very care- fully on a number of fronts. It is appeal- ing Ofgem's tightening on rate of returns but has just agreed a chunky premium for WPD. Its decision to shun gas will inevita- bly impact confidence in this sector, yet it will be trying to talk the assets up to get a good deal. It will inevitably be seeking efficiencies with WPD but conscious that Ofgem will be taking careful note of this when forming its determinations for ED2.

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