Utility Week

UTILITY Week 20th June 2014

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compensation when they breach them, and better support vulnerable customers. But the clincher is price. Most offer to reduce prices. ENWL's offer is representative: "We are reducing our average prices by 16 per cent compared to DPCR5, delivering the benefits of RIIO-ED1 early by not having to increase our prices for domestic customers in 2014/15 and kick-starting RIIO-ED1 with a price reduction of 18 per cent in 2015/16." A great deal, right? The first thing Haggle Hero would look at is the process of RIIO- ED1: how well have we haggled? Although the key interaction for RIIO-ED1 is a bilateral one between Ofgem and the net- works, the extent to which there is broader public engagement in the process will influ- ence the outcome. Unfortunately, price con- trol processes tend to fly under the radar, and RIIO-ED1 has been no exception. It is remarkable that with energy pric- ing such a hot political potato, a process that will lock in tens of billions of pounds of investment and costs over the eight years 2015-23 has received so little public attention. This shouldn't surprise us. It's a feature of our disaggregated energy system, where generation, transmission, distribution and supply operate as separate businesses, that public commentary tends to focus on the last link in the chain, the suppliers. The absence of media coverage of the process wouldn't necessarily be a problem if there was strong engagement by others. But this is mixed at best. Only two suppliers responded to the Energy and Climate Change Committee's recent call for evidence on net- work costs. Why? At least in part it's because network price controls are as impenetrable to suppliers as they are to the rest of us. 6 | 20th - 26th June 2014 | utILItY WeeK Comment R eviewing the latest set of business plans submitted by the electricity dis- tribution network operators for the RIIO-ED1 price control, I was reminded of a MoneySuperMarket.Com advertisement fea- turing "Haggle Hero", played by comedian Omid Djalili. It goes like this. Woman on phone at work: "It's just very expensive, but I suppose if that's your best quote than Iā€¦' Haggle Hero: [interrupting] "No, no, no you people can't haggle for toffee, give me that!" [snatches phone from woman] Woman: [taken aback, hands over phone] Haggle Hero: [yelling down phone line] "It's a hatchback not a limousine, she's not paying that, you're having a laugh! [covering phone and speaking to woman] "You don't have to worry about hurting his feelings, he's a professional." It's easy to lose sight of what is at stake in regulatory prices control processes like RIIO-ED1. These nego- tiations between companies and regu- lator take place over years and involve thousands of pages of documents going back and forth. For example, UKPN's business plan consists of nearly 200 separate documents ā€“ documents, not pages. But at its heart, this is no different than the interaction between buyer and seller for the hatchback in the advertisement. So, are we being offered the product or service we need? Is the price fair? What would the Haggle Hero make of the latest set of network business plans? How confident would he be of us extracting a good deal? Or are we being sold a hatchback for limousine prices? The networks' pitch is clear: consumers stand to benefit both in prices and quality of service during the eight years from 2015. They promise to make big new investments in their assets, not only to cater for load growth and to deliver improvements in reli- ability and safety, but also to make the net- work "smarter". They also commit to meet tighter interruption standards, pay more Who's haggling for customers? The DNOs are presenting RIIO-ED1 as a tough price settlement, but have consumers really got a good deal? Or are they being asked to pay top dollar for business as usual. Chris Alexander has his doubts. Blog spot Chris Alexander, policy manager, Citizens Advice Ofgem's latest call for input on the networks' business plans only yielded 16 submissions. Because of the length and complexity of the plans, it's a real challenge for interested par- ties to get to grips with the them. The networks will argue, not without justification, that they have gone to great lengths to present their business plans in a way that describes the key features in a clear and straightforward way. But when the net- works continue to bury critical information about consumer impacts in the dark recesses of their plans, or present it prominently but in a way that can give the wrong impression of what it really means, you can't help but be a little cynical. Missing from the executive summaries of the plans is a clear explanation of the impact of the new depreciation rules Ofgem has introduced for RIIO- ED1. Because networks can now recoup their costs over 45 years rather than the former 25 years, it means prices can be cut in the short term, but only at the expense of higher prices later. So a big part of the decline in prices that the net- works are offering isn't the result of a dramatic improvement in efficiency, it's an incident of an accounting change. But our biggest gripe is the lack of clarity on the total revenue the networks will collect over the life of RIIO-ED1. While much of the discussion about returns centres on the 6.0 per cent allowed rate of return on equity set by Ofgem, if the various incentives that are available to the networks are added to the pot, this number could double. To be fair, the networks are also subject to penalties that could mean they earn less than 6.0 per cent. But what you don't get from the business plans is a sense of the probability distribu- tion of these returns. If the curve is skewed towards the upper end of returns ā€“ if 6 per cent isn't the real midpoint ā€“ then this needs to be made absolutely clear to consumers. There's no way Haggle Hero would let us sign off on RIIO-ED1 until the networks answer these questions. And neither should Ofgem. "The networks continue to bury critical information about consumer impacts in the dark recesses of their plans"

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