Utility Week

UTILITY WEEK | JANUARY 2022 | 21 Regulation vide consistency, there are good grounds for questioning whether either appeals model has really worked. A fresh approach is needed to the cost of capital, to make the process less confrontational and to drive consistency. The UKRN process is not a transparent one but could perhaps be built on. Scottish Power have called for some sort of Commission on the cost of capital. What is clear is that an appeals regime that can come up with two quite di• erent answers really doesn't help. In contrast, the CMA's re‚ ections on the outper- formance wedge make for interesting reading as a guide to good regulatory practice. The CMA makes clear that some outperformance by companies can be justi… ed if it is a reward for delivering improved outcomes for customers that they value. It acknowledges the problem of information asymmetry but sees it as a core part of the regulator's job to try to … nd ways to address that, pointing to the various steps that Ofgem had taken in RIIO2. In essence what it concludes is that to justify an outperformance wedge Ofgem would have to show that there is still an expectation of outperformance a‰ er all these steps have been taken (that is, not just that there was outperformance historically). It is also clear that an adjustment to the cost of equity is not the best way of dealing with the problem – the aim should be to get the incentives and allowances correct – and that the proposed form of the wedge would dampen incentives on companies to perform. Throughout the decision the formulation the CMA uses is that the appellants did not demonstrate that Ofgem was wrong or, where it was wrong, that Ofgem did not provide the evidence to support its approach. That essentially re‚ ects the legal framework in which energy appeals are considered but does create the sense that if you tried again with better arguments you mightŽwin. As such there is no sign yet in ED2 that Ofgem is rowing back on the outperformance wedge or that com- panies have now accepted Ofgem's cost of equity and ongoing e" ciency level (although we wait on the … nal business plans to see how far it has moved). That may simply be a part of the regulatory "dance" at this stage but in the past a CMA decision would have been seen as setting down a de… nitive marker. The di• erent outcomes between water and energy in large part re‚ ects the di• erent regimes but may also simply re‚ ect a di• erent panel composition. The CMA repeats regularly that its past decisions are not binding. The appeals regime is not providing the certainty it should if parties think they can roll the dice again and hope for a di• erent result. One … nal re‚ ection is that huge credit has to be given to the CMA for managing the process of eight concur- rent appeals and delivering a verdict in seven months (as against the 12 taken for water). It achieved this by joining appeals where they covered common issues. This will have created problems for the companies, which all had their own legal advisers and economic consultants. It is clear from the CMA decision that on technical points around cost of equity, for example, the companies all had their own views on the right approach. Although not articulated in the decision, one cannot help but feel that this range of views will have only reinforced the sense that there is no "right answer" and hence that it is hard to argue that Ofgem was "wrong". No doubt the process was frustrating at times, with companies limited to a single spokesman on particular issues at the oral hearing. But it is hard to see how it would have worked otherwise. There is nothing in the CMA's decision to suggest that the companies raised major procedural concerns, which is a credit to all concerned (although the companies formally have three months to lodge a judicial review if they feel the process was unfair). The end result would seem to be in broadly a sensible place viewed as a decision in its own right. But it raises serious questions about how the appeals processes across energy and water (and more widely) needs to evolve to facilitate a consistent approach across regula- tors which commentators have long been calling for. That needs Treasury and the Department for Business, Energy & Industrial Strategy to make clear that this is a policy outcome they would like to see, but without a bit more noise being made about the CMA's decision it's unlikely to happen any time soon. Maxine Frerk, director, Grid Edge

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