Utility Week

6 | JUNE 2021 | UTILITY WEEK The Month in Review Ofgem says RIIO2 appeals are 'without merit' O fgem has urged the Com- petition and Markets Authority (CMA) to dis- miss the appeals by the trans- mission and gas distribution networks against their final determinations for RIIO2, claim- ing they are "without merit". Responding to their notices of appeal in a submission to the CMA, Ofgem said the networks' complaints "amount to no more than disagreements" with the way it has exercised its "expert regulatory discretion". The regulator said the appellants' main challenge to the cost of equity should be rejected because they do not demonstrate that its decision was wrong on one or more of the statutory grounds of appeals. It said estimating the cost of equity is "an exercise in the unknown", with the parameters under the capital asset pricing model (CAPM) – the risk-free rate, total market return and the equity beta – being "inher- ently uncertain and not directly observable." Concerning the risk-free rate – a measure of the rate of return investors would expect to receive for a completely risk-free investment – Ofgem accused the appellants of mischaracteris- ing its position, stating it does not view index-linked gilts as a "perfect, error-free proxy". It said index-linked gilts instead offer the best possible proxy for All the UK's electricity transmission networks have appealed their final determinations to the CMA Fourth CfD allocation round opens in December The fourth contracts for difference (CfD) allocation round will open to applications in December 2021. The announcement was made in an update on the resource por- tal for the allocation round, which said the "confirmation of the round opening in December and no earlier will provide further clar- ity to prospective participants". The Department for Business, Energy and Industrial Strategy has previously stated that it will seek to procure 12GW of low-carbon generation – more than double the 5.8GW of capacity contracted in the previous auction in Septem- ber 2019. A‹er more than half a decade without access, the allocation round will include an auction for more established "pot 1" technologies – onshore wind and solar. Less established technologies such as tidal and floating offshore wind will be able to compete in the "pot 2" auction and there will also be a third separate pot for offshore wind for the first time. Utility Week regularly covers the lat- est changes to senior teams across the sector. Here is a selection of the latest moves: National Grid Nicola Shaw is to step down from National Grid's board at the end of July. National Grid said that following its "strategic pivot" towards power, with the acquisition of Western Power Distribution and the decision to sell its gas transmis- sion arm, the role of UK executive director would not exist in the new operating model. Shaw will stay with the com- pany until the CMA appeals are concluded later this year and will continue as chair of National Grid Electricity Transmission plc and National Grid Gas plc, to help the new management teams. Thames Water Alastair Cochran will join Thames Water as its new chief financial officer following Brandon Rennet's decision to leave the business. Cochran will join the company in September, with Rennett remaining in his role until then. Cochran has worked as CFO at Petrofac, in a number of finance and commercial leadership roles at BG Group, and as a senior investment banker at Morgan Stanley. He spent his early career at KPMG, where he trained as a chartered accountant. Heat Trust Stephen Knight has taken on the role of managing director at the consumer body for heat networks. Knight joins from London Trad- ing Standards, where he was the director leading the London-wide partnership of Trading Standards services. He served as an elected council- lor in Richmond upon Thames for 20 years, including time as deputy leader of the council and as a London Assembly member, chairing the Assembly's environment com- mittee. He replaces David Watson, who joined Cadent last month as its head of energy transition. ON THE MOVE what the appellants accept is a "hypothetical number" without requiring "a series of discretion- ary adjustments" as would be required if the regulator followed their suggestion of using AAA- rated corporate bonds. On total market returns (TMR) – a measure of the aver- age returns an investor would expect to receive for investing within the market as a whole – Ofgem said appellants raised "narrow, esoteric points, all of which concern matters of regula- tory judgement, in a context where it is common ground that TMR is, as a measure of inves- tors' ex ante expectations of equity returns, unobservable". On its decision to set allowed returns below the mid-point of its estimated range for the cost of equity, Ofgem acknowledged that it is common for regulators to instead "aim up" as the CMA did in its PR19 redetermina- tion. However, the regulator said there is "no general rule that 'aiming up' is required" and that the merits of doing so are dependent on its level of confidence in its estimates and its assessment of the level of risk of underinvestment. It said its downward adjust- ment of 25 basis points to reflect investors' expectations that networks will exceed the baseline profit margin based on past performance – known as the outperformance wedge – is "strongly grounded in economic evidence, which supports the view that information asym- metry is a structural feature of price controls and that a degree of outperformance based on information asymmetry cannot be excluded". For the latest developments on the CMA appeals in the energy sector go to https://util- ityweek.co.uk/tag/riio2/ Tom Grimwood, energy editor

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