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16 | 23rd - 29Th MaY 2014 | UTILITY WEEK Policy & Regulation Analysis E lectricity distribution network opera- tors (DNOs) should be nervous. While their network peers in transmission and gas distribution are safely into their first year of the RIIO price settlement, DNOs face the nail-biting wait for Ofgem's dra determination in July. MPs are lining up an inquiry into network costs and DNOs look like the readiest target to press for price cuts. Now British Gas has weighed in to helpfully suggest slashing £500 million a year from their revenue allowances. It is unfortunate timing. The pressure on energy bills has intensified since Ofgem set prices for the other networks. Energy sup- pliers are taking flak for rising energy prices and are happy to point out that network costs make up around 23 per cent of the typi- cal dual fuel bill. Now it is the DNOs' turn under RIIO, and they must convince not only the regulator but politicians that their busi- ness plans are good value for money. National Grid, which owns every type of energy network except electricity distribu- tion, on Thursday revealed an impressive return on equity of between 12.4 per cent and 13 per cent for its UK regulated busi- nesses – significantly higher than the 10 per cent assumed by Ofgem. While the company proudly announced it was returning £70 mil- lion of efficiency savings to customers, it did not escape The Telegraph's notice that share- holders get £100 million. It is largely academic whether the results reflect efficiency and innovation from National Grid or a generous allowance from a toothless regulator. National Grid's prices are set out to 2021 and it would take excep- tional circumstances to revisit them. The pro- cess is designed that way to forestall the risk of political intervention and give companies the stability to finance and run efficiently. Government meddles at its peril. That is why an Energy and Climate Change Select Committee inquiry into net- work costs is likely to home in on the one sub-sector still open to influence: electricity distribution. The cross-party group of MPs is due to hold hearings before the summer recess, although a packed schedule could see it pushed back to autumn. Meanwhile, a published list of written evidence submis- sions gives a taste of what is to come. The most aggressive submission came from British Gas, which opted out of Energy UK's strictly factual offering to criticise "overly generous" regulatory allowances and a "lack of transparency" on network costs. The supplier went further and suggested ways Ofgem could (and in British Gas's view, should) get tough on the DNOs and save households £96 by 2023. These ranged from a one-off crackdown on alleged double charging for certain connection services to a further squeeze on the (already reduced) cost of equity allowance. Network industry figures privately grum- ble that British Gas's numbers are unsub- stantiated, but they have not come out with a detailed rebuttal. In any case, the analysis puts DNOs and Ofgem on the defensive. Not all stakeholders are fixated on costs, however, and the renewables lobby raised the opposite concern: that prioritising short- term savings could hit investment in the infrastructure needed to support low- carbon technologies. An incremental approach to network upgrades could cost more in the long run and hinder connections of wind turbines and solar panels, Renewable UK argued. The six DNOs have all planned their investments around low expectations for the take-up of low-carbon technologies. However the arguments may pan out in Parliament, British Gas has given MPs ammunition for some tough questioning. DNOs had better be ready. British Gas sticks it to DNOs Network costs are coming under close political and regulatory scrutiny, and not before time, says British Gas: DNOs could slash their bills and save customers £500m a year. Megan Darby reports. Where British gas says DNOs cOulD make the saviNgs Source of customer Justification Industry Domestic One-off/ Industry Impact Domestic bill savings Impact bill impact Recurring by 2023 impact by 2023 Decisions Ofgem can take to help customers immediately Allow Electricity Distribution Losses Networks should not be allowed to make adjustments to incentive schemes because £409m £11 One-off £409m £11 Incentive to run as intended they prove adverse to them (while keeping the rewards for those that are favourable). Ensure money recovered through Excluded The regulatory treatment of these costs was changed in April 2010 leading to some. Networks £91m £2 One-off £91m £2 Services is returned to customers double charge. This treatment, which has been clear throughout, needs to be enforced. Total £500m £13 One-off £500m £13 Recommendations to improve price control on Electricity Distribution (RIIO-ED1) Set Cost of Equity at a lower level Ofwat identified Cost of Equity of 5.65% for similar business models in the water industry £131.2m £2.61 Recurring £1049m £20.91 and the Competition Commission suggested 3.8% to 5.5% would be appropriate. This gives a more appropriate range than Ofgem's 6.0%. Challenge networks to greater efficiency Networks are generally given allowances for some costs increasing with or above inflation. £43.6m £0.92 Recurring £349m £7.40 By setting costs incentives below inflation, greater efficiency savings can be materialised. Immediate move to 45 year asset lives The increase in asset lives should be brought in immediately. £170.4m £3.38 Recurring £1363m £27.04 Ensure incentive schemes only reward Virtually all networks currently outperform allowed returns. Incentive should only reward. £181.2m £3.50 Recurring £1449m £28.03 high-performing networks the higher performing networks and penalise the poorer perform in Total £526.4m £10.41 Recurring £4210 £83.38