Utility Week

22 | APRIL 2023 | UTILITY WEEK Regulation Comment Back to the CMA W hen all the transmission and gas distribution companies appealed against their RIIO settle- ments two years ago I noted that the design of energy appeals meant there was no downside risk in appeals, with companies able to cherry-pick the issues on which they felt they had a good case. However, there are costs – as well as the he• y adviser fees, it's a man- agement distraction and risks damaging the regulatory relationship. What the last round of RIIO appeals also showed is that the bar for the Competition & Markets Authority (CMA) to decide that a decision is "wrong" is a high one. It had seemed as if the changes that Ofgem made between dra• and „ nal determinations (plus a few further corrections made a• er „ nal determinations) would be enough to deter companies from appeal- ing. On the big issues such as cost of capital and the e… ciency challenge Ofgem used the same „ gures in ED2 that had been supported by the CMA previously, further reducing the prospects for an appeal. However, Northern Powergrid which had been alone among the DNOs in appealing against ED1, clearly felt driven to try its hand again. The appeal is on a relatively technical question around cost allocation. One of the features of ED2 was the huge uncertainty that exists around the level of take-up of electric vehicles, heat pumps, batteries etc – and hence the level of investment that will be needed in the local networks over the next „ ve years. Ofgem le• it to the companies to decide what assumptions to make and then at the eleventh hour real- ised that it couldn't actually benchmark the companies without picking a central scenario to do the analysis around. At dra• determinations it therefore based its analysis on the lowest-cost scenario consistent with net zero (which was the ESO's System Transformation scenario that has more reliance on hydrogen and less on electri„ cation). As the companies had all put in their plans based on di" erent scenarios, Ofgem then had to adjust the costs in the companies' plans to align with that chosen scenario. Northern Powergrid's appeal isn't about this process per se – it's a long way from ideal but could easily be defended by Ofgem as regulatory discretion. Northern Powergrid's issue is with how Ofgem did that adjust- ment and in particular how it then allocated the reduced total costs between di" erent cost categories. This is important because the other feature of ED2 is the heavy reliance being placed on uncertainty mechanisms/ volume drivers to adjust the cost allowances through the course of the price control depending on, for example, the levels of demand growth that actually materialise. In doing this allocation Ofgem used a 50-50 mix of the original cost breakdown from the company plans and the cost breakdown from Ofgem's own modelling. The problem for Northern Powergrid is that its plan, which was based on a high level of electri„ cation, would be enough to deter companies from appeal- ing. On the big issues such as cost of capital and the e… ciency challenge Ofgem used the same „ gures in ED2 that had been supported by the CMA previously, further reducing the prospects for an appeal. However, Northern Powergrid which had been alone among the DNOs in appealing against ED1, clearly felt driven to try its hand again. The appeal is on a relatively technical question around cost allocation. One of the features of ED2 was the huge uncertainty that exists around the level of take-up of electric vehicles, heat pumps, batteries etc – Northern Powergrid is alone among the DNOs in appealing against its fi nal RIIO-ED2 determination. So what are the company's chances of winning and what could the result mean for other networks?

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