Utility Week

UTILITY WEEK | APRIL 2023 | 23 Regulation included a high level of load-related expenditure. If that same proportion of load-related expenditure is assumed in the scaled back total costs and is then stripped out into an uncertainty mechanism, Northern Powergrid gets le with a lower baseline allowance than it should. Ofgem accepted this point to some degree and moved from using 100% company cost allocations at dra determination to the 50-50 approach at final determina- tion. Northern Powergrid argues that this is a question of principle not degree. Ofgem will no doubt argue, as it did at final determination, that the alternative to its own model is not perfect either, that the 50-50 approach is therefore a reasonable compromise and that this a point of regulatory discretion. In my view Northern Powergrid has a point but Ofgem will probably win. But let's see. For Northern Powergrid the motivation seems to be in part about money – the cost allocation is worth £157 mil- lion – but also pride. The second strand of its appeal is that as a result of the approach Ofgem has taken it was not awarded a Business Plan Incentive. On other metrics of efficiency which Ofgem uses Northern Powergrid (Yorkshire) was judged second most efficient with two of UK Power Networks' licence areas coming first and third. The two UKPN areas then secured a BPI reward and Northern Powergrid didn't. This feels like it's a matter of pride for Phil Jones rather than a real concern about the £15 million reward. The next step is for Ofgem to make a submission as to whether the appeal should be allowed (and it will no doubt say it shouldn't be). The CMA will then have to decide whether to allow the appeal (and will almost certainly say it does). There's then a six-month process of submissions and hearings. One other question is what interest the other DNOs take in the appeal. At ED1 all the DNOs ended up heavily involved in part because there was a parallel appeal by Centrica that would have directly impacted their allowed revenues. However, in this case the outcome has no direct bearing on the other DNOs so I would expect them to watch quietly from the sidelines (unless UKPN pride leads it to want to defend its BPI reward!). Given concerns about the costs of these appeals – including the impact on an already stretched Ofgem team – minimising the number of interveners and keep- ing the process as streamlined as possible would be a good thing. The subject matter of this appeal is very much a technical question down in the detail of the price control cost models. However, how it is approached remains of interest given that the appeals regime itself is one of the topics that government has said it will be looking at as part of its Review of Economic Regulation. In its original paper government said it was looking at moving water (where there is a full re-hearing) on to the energy appeals model. However, the energy model is not with- out its faults. In my view what is required is a hybrid. Or does that sound too much like the 50-50 approach that Ofgem proposed for its cost models? Maxine Frerk is a former senior partner at Ofgem and currently a director at Grid Edge Policy, and a Sustainability First associate Analysis Utilities & the CMA: A brief history RIIO-1 Northern Powergrid is no stranger to the CMA appeals process having challenged Ofgem's final determination in 2015. The DNO opposed the regulator's stance on three grounds, in relation to real price and regional labour adjustments and savings related to smart technology. The CMA dismissed the first two of these challenges but upheld the third. Northern Powergrid's plea for greater leniency from Ofgem was countered by a separate appeal by British Gas for the price controls to be tougher. All but one of British Gas' six appeal points were thrown out by the CMA resulting in an adjustment to one of the incentives. PR14 Ofwat's 2015-2020 price review determinations were accepted by 18 of the 19 water companies with just Bristol Water break- ing cover. The company sought a £128 million upli in its totex settlement but the CMA eventually allowed it an extra £20 million. PR19 Aer much speculation about a mass of appeals over the cost of capital for AMP7, four companies eventually took their con- cerns to the CMA – Bristol again, along with Anglian, North- umbrian and Yorkshire. The key points of contention were the cost of capital, as well as individual complaints about totex allowances and the amount bills could be reduced. In its dra determination in September 2020 the CMA indicated a rate of return for the appellants at 0.54% above Ofwat's declared level. However, the final decision in March 2021 narrowed the gap to 0.2% difference. The companies also won some conces- sion on spending and bills. RIIO-2 Just days before the CMA gave its final ruling on the water price controls, all eight of the electricity transmission and gas networks lodged their own appeals against Ofgem's view of their business plans. Unlike the full redeterminations in the water sector, the energy networks were able to challenge individual elements of the regulator's decision. While each company had particular gripes, a common thread was once again the rate of return but also the "outperformance wedge" introduced by the regulator to counteract information asym- metry between itself and the networks. In this case the CMA produced a swier response with much closer alignment between dra and final determination. Ofgem won out on cost of equity but the companies did score a decisive victory with the removal of the outperformance wedge. James Wallin, editor

• Cover