Utility Week

12 | NOVEMBER 2022 | UTILITY WEEK Regulation Comment The bridge to RIIO3 Ofgem has belated kicked off the process of examining what the next round of price controls could look like. But has it left it too late to entertain more radical suggestions for overhauling the price control process? I t's a bit like painting the Forth Bridge. RIIO-ED2 (the electricity distribution price control) isn't yet wrapped up and already Ofgem is starting the process for RIIO3, with an open letter inviting initial views. It was a strange letter that had the feeling of some- thing cobbled together in an a- ernoon a- er a brief con- versation with the transmission networks. Ofgem clearly felt it couldn't just put out an open call for input without giving some direction, but aside from the observation that there's a lot that needs doing on electricity and a lot of uncertainty on gas it did not say much. Contrast that with the open letter that kicked oƒ RIIO2, which was three times the length and set out the high-level principles Ofgem expected to follow, includ- ing a stronger voice for consumers, simplifying the framework and a more adaptive approach. Or the equivalent consultation kicking oƒ PR24 for the water sector in December 2020 (ie nearly a year earlier in the process), which included a comprehensive review of the lessons learned in PR19 and the launch of an Ideas Lab to let companies and others feed in thoughts on how to improve the framework against some clear high level challenges set out by Ofwat. Given the short timescale it is worrying that Ofgem's letter is essentially inviting views on whether it should take a completely diƒ erent approach from RIIO – going back round the loop on negotiated settlement, ex post rate of return regu- lation etc. Ofgem went round these more radical ideas at the start of RIIO2, which just wasted a lot of time so that in the end the whole process for trans- mission and gas distribution was highly compressed. The Sector Speci" c Methodology was only published in May 2019 with dra- business plans due to be submitted just over a month later. That should be the " rst lesson from RIIO2 – ensure there's enough time to do a good job. That said, Ofgem is absolutely right that the scale and nature of the challenges ahead means that some things do need to change. However, the RIIO framework is pretty – exible and a focus on incentives, innovation and outputs must still be right. Any move away from the regulated asset value model (which has just been hailed as the way to deliver nuclear) would clearly spook inves- tors. So, the question is how the RIIO model can adapt to meet the new challenges – and the answer needs to vary much more explicitly by sector. On electricity transmission, which appears to be top of mind for Ofgem, there has been a huge amount of work going on in response to the government call in the British Energy Security Strategy for networks not be a barrier to the ambitious levels of renewable generation targeted for 2030. National Grid Electricity System Operator (ESO) has set out the strategic investment projects it considers are needed based on its Holistic Network Design. Ofgem has then consulted on accelerating onshore investment – eƒ ectively giving a green light to the need for the invest- ment identi" ed by the ESO and streamlining the current RIIO processes for looking at the proposed costs. This provides a template for how T3 needs to evolve. Longer-term view These major investments don't " t into neat " ve-year packages and the plans have to start with what is needed to meet net zero and long-term political goals on energy security. But this accelerated approach has been designed to work alongside the existing RIIO process and should provide a role model for how it might work going forward. That would leave the " ve-yearly price control for transmission playing a smaller role but still an important opportunity for a stock-take on cost of capital, operating costs and wider environmental actions, for example. On gas, Ofgem really needs to get its thinking cap on – and to have some serious conversations with govern- challenges set out by Ofwat. Given the short timescale it is worrying that Ofgem's letter is essentially inviting views on whether it should take a completely diƒ erent approach from RIIO – going back round the loop on negotiated settlement, ex post rate of return regu- lation etc. Ofgem went round these more radical ideas at the start of RIIO2, which just wasted a lot of time so that in the end the whole process for trans- mission and gas distribution was highly compressed. The Sector Speci" c Methodology was only published in May 2019 with dra- business plans due to be submitted just over a month later. That should be the " rst lesson from RIIO2 – ensure there's enough time to do a good job. Maxine 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 regulated company and consumer/community group clients.

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