Utility Week

24 | MAY 2021 | UTILITY WEEK Policy & Regulation Comment It's been a busy time forCMA watchers The dust hasn't yet settled on the water appeals before the CMA starts the mammoth task of considering the mass of submissions from network companies. Maxine Frerk looks at the latest developments. W e have recently seen announcements on the three sets of appeals that should be on a Com- petition and Markets Authority (CMA) watcher's radar – the granting of permission on the RIIO2 appeals, the nal decision on PR19 in water and the decision on the rather obscure SSE code modi cation appeal. RIIO2 appeals permission Of surprising interest was the granting of permission for the eight RIIO2 appeals in which all the network com- panies have appealed against Ofgem's decision on the cost of equity, with most then appealing on a number of other issues as well. The fact that the CMA has granted permission is not of itself a surprise. However, its decision makes clear that Ofgem had argued against the companies being granted permission on all but the central grounds around cost of equity and ongoing e‰ ciency savings. Ofgem had argued, for example, that the di‹ erences weren't material or that past CMA decisions – in particu- lar the System Operator Northern (SONI) case on appeal rights – meant there was no prospect of success. The CMA argued in all cases that they needed to hear the full case before they could decide. They also made the point (in relation to SONI) that the CMA is not bound by its past decisions. Decisions will always depend on the particular facts of the case but this is also an important reminder of the way that the CMA panels work – and of particular relevance as energy companies look across to the PR19 decision. More importantly, the CMA has made its permission conditional on the appeals being joined across companies where they are appealing on cost of equity, the outper- formance wedge, ongoing e‰ ciency or the appeals rights for in period decisions. This really makes sense. As I ' agged last month, the alternative was both unmanageable and risked perverse outcomes of some companies securing changes and others not, depending how well they argued their case. What is proposed is now much more manageable for Ofgem and the CMA but will create a real head- ache instead for the companies, who will undoubtedly be required to agree a common set of arguments. The armies of lawyers and consultants that the companies have lined up will not be happy being shoe-horned into a common framework but it's hard to see how it could have worked otherwise. The CMA has also announced the panel for the RIIO2 appeals – an ex-Treasury civil servant, a lawyer and an accountant with signi cant regulatory experience. That seems a reasonable balance given the nature of the appeals but notably there is no overlap with the panel for the water appeal (although at working level there presumably will be). The chair is the same as on the SSE code appeal which may not give the companies much comfort given where that landed. PR19 water decision The CMA's nal decision moved slightly from the pro- visional decision that was published last year but is broadly in line with the working papers on cost on equity that the CMA published in February. As such the deci- sion had been well trailed. Putting aside the detail, the core message remains that this was very much a judgment call around the right balance between long-term investment and short-term customer bill impact and where the CMA seemed to place more weight on the longer term. As I've ' agged previously, it is not clear what quali- es the CMA to be a better judge of where that balance should sit than a regulator that is closely plugged into the ongoing public debate in these areas. This is the argument in favour of the energy appeals regime where the CMA is not able to overturn an exercise of regulatory discretion. Of course, it was not all about that balancing. The CMA's view that nanceability should be addressed by increasing the cost of equity not by adjusting the "pay as you go rate" (in e‹ ect bringing forward cash ' ows from the future) is a more principled point and in line with how the rating agencies assess nancial resilience. Inter- estingly this is not an issue raised in the RIIO2 appeals. One nal general observation is the number of times the CMA reached a di‹ erent decision to Ofwat because it was able to draw on more up-to-date data – on operat- particular relevance as energy companies look across to the PR19 decision. are appealing on cost of equity, the outper- formance wedge, ongoing e‰ ciency or the appeals rights for in period decisions. This securing changes and others not, depending how well they argued their case. more manageable for Ofgem and the CMA but will create a real head- 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 regu- lated company and consumer/ community group clients.

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