Utility Week

UTILITY WEEK | AUGUST 2021 | 19 Policy & Regulation network assets. He said its description of the asset life is somewhat misleading because it is essentially a regulatory construct, par- ticularly since the introduction of the totex arrangements whereby operational expendi- ture is capitalised as part of the RAV. Ofgem's leadership questioned He also accused Ofgem of becoming "very politicised" in recent years and "behav- ing in a way that could be trying to get the right headline rather than right outcome," stating: "I think the jury's out with Jonathan Brearley and Martin Cave." "The regulator clearly got burnt in the last price control where, at least its per- ceived, returns got a bit out of control, so it's created a very complicated price control with lots of mechanisms to try to limit outper- formance," Erwin remarked. "The effect is you reduce the incentives of companies to outperform their plans and that's a bit disappointing. I think you could have done it with a return adjust- ment mechanism and then let the rest of the mechanisms properly incentivise. I think that Ofgem as it finalises the price control just needs to make sure that it maintains the strength of the incentive mechanisms to get the right outcomes for customers." He continued: "Linked to that, there's an awful lot of a‰er-the-event judgement- led processes that create regulatory risk and also create complexity. We've now got a very complicated price control that's dif- ficult for a member of the general public to understand and frankly difficult for Ofgem to operate, and if you look at the struggle it is having in defending the gas and transmis- sion appeals, a simpler thing which is easier to operate, which its properly resourced to do so, might have been the better outcome for everyone involved. "We'd like to see more evidence of the regulator acting in the disinterested best interest of customers in the long term and we'd like the confidence of seeing the regula- tor be less obviously political, because the whole point of having a regulatory struc- ture is to keep the regulated industry at arm's length from political interference and certainly in recent years that degree of depo- liticisation seems to have been eroded." A spokesperson for Ofgem said: "We've worked with industry to make our price controls as effective as possible. This will deliver affordable net zero carbon emissions for consumers, both today and in future, as network spending ultimately comes from their bills." Tom Grimwood, energy editor RIIO-ED2: analysis U K Power Networks (UKPN) chief executive has stressed that distribu- tion network operators (DNOs) must spend "only what is necessary, not what is allowed" over the next five-year price control period. In an interview with Utility Week, Basil Scarsella admits that UKPN's business plan has taken a different approach to other DNOs in several areas (see p17). At face value, the company's bid for a 7 per cent rise in totex at the outset of ED2 seems to be out of step with out of step with calls to accelerate investment in accelerating investment to ensure the distribution net- work is prepared for the pressures net zero will apply. Scarsella retorts: "We are ambitious and that's why we've costed the five scenarios. But we also want to keep customer bills low. "We don't want to say, 'give us a £5 billion allowance and we will go ahead and spend it', because the first issue is where should we invest with confidence? The reality is that no one can predict for sure where demand for EVs and heat pumps is going to appear and to what extent." He adds: "Whether you ask for a high level of totex upfront or not, the way you go about delivering investment is the same. You plan the network based on where you are confident that the capacity will be uti- lised without overinvesting. All we are say- ing is that there is no point asking for all this totex upfront until we are more confident on the need." Suleman Alli, UKPN's director of strat- egy and customer service, tells Utility Week the whole thrust of the plan is to "make the smart future a reality". At the heart of this is the plan for a "fully separable" DSO (distribution system opera- tor) business unit as a "separate legal entity" with an independent advisory board. UKPN estimates this could deliver direct benefits of approximately £400 million and enable between £1.3 billion and £5.4 billion of wider, whole-system benefits up to 2040. Initially, the DSO will come under the UKPN umbrella but Scarsella insists the independent advisory board "will keep us honest". Alli says: "If we establish a separate DSO which makes investment decisions fully independently of the DNO and in the interest of customers then that DSO should put full throttle behind flexibility, energy efficiency and smart tariffs. It can work with new entrants to help them put forward compel- ling propositions so that customers can con- sume when it's cheaper and greener. "That's a win for consumers because they benefit from reducing energy costs, plus it's a win for networks who should also ben- efit from the value created for consumers by using smarter solutions." But given the DSO model is in its infancy and the question of separation from DNOs is not yet settled, what does an independent model actually mean at this stage? Scarsella is adamant that the move sends a clear signal about the independence of continued overleaf 'Asking for more money doesn't show ambition' UKPN is ploughing its own furrow when it comes to ED2. James Wallin hears from the company's senior executives about why asking for less will deliver more. UKPN CEO Basil Scarsella: you can't invest until you know where the demand is

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