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14 | 13th - 19th March 2015 | UtILItY WEEK Policy & Regulation Analysis T he gloves are off. This week, the UK's largest energy supplier, Centrica- owned British Gas, took the unprec- edented step of referring another part of the energy industry, the power networks, to the Competition and Markets Authority (CMA), as exclusively revealed by Utility Week. To be more precise, it referred Ofgem's eight-year price settlement, RIIO-ED1, effectively put- ting the regulator and five of the six network companies in the dock. The referral will be seen in some quarters as a declaration of war – but the battle lines were drawn months ago. With energy afford- ability top of the political agenda, there has been growing heat around network costs, which make up around one-fih of the bill (see right). The Energy and Climate Change Select Committee, under the relentless lead- ership of Tim Yeo, ended an investigation into network costs late last month with the conclusion that Ofgem's price settlements have been "too generous, and performance targets too low". British Gas gave evidence to the commit- tee last May, claiming a tougher regulatory regime could slice £500 million a year off network costs. The supplier was also thought to have attempted to bring networks into the remit of the current CMA inquiry into the energy market, to which it itself is subject. That having failed, the supplier's deci- sion to go a step further and make a refer- ral itself, using its status as an "interested party", raises numerous questions. Is British Gas acting out of conviction or desperation? What are its grounds, and how likely is the referral to result in an eventual change to RIIO-ED1? What does this mean for the net- works and the beleaguered energy regulator, Ofgem? The picture is further complicated by the fact that one of the networks, Northern Pow- ergrid, has also chosen to refer itself, arguing the opposite of British Gas, that the settle- ment is not generous enough. First up, British Gas. An investor note from Deutsche Bank utilities analyst Martin Brough this week sounds a note of scepti- cism over the supplier's motives. Brough notes that British Gas's parent company, Centrica, slashed its dividend by a third ear- lier this year aer dismal results for 2014 saw profits fall 35 per cent. Under the heading "if you're in a glass house, don't throw bricks', Brough's note reads: "Centrica's British Gas does not own networks but pays for network delivery and is presumably claiming that the price con- trol is too generous. It chose not to appeal against the transmission and gas distribu- tion price controls in 2012/13 but that was before the CMA's retail inquiry and Centrica's 30 per cent dividend cut. While the company might like the idea of paying less for network delivery, it needs to be careful about arguing for a low cost of capital when the CMA is just applying a ROCE framework to British Gas. It might also be odd that it argues that finance- ability is not a concern for the networks when Centrica has just cut its dividend by 30 per cent, apparently on financeability grounds." While British Gas isn't making any public statements about the referral, Utility Week has obtained a copy of the legal document in which it sets out its grounds. A cross- reference of this with the company's writ- ten evidence to the select committee gives a good sense of what its arguments will be. The first issue is Ofgem's decision not to return "double-recovered revenues". In its select committee evidence, British Gas claimed the networks had "double- recovered" £91 million in connection costs that had been recouped both through net- work charges, affecting all customers, and direct from the connectees. Second, British Gas alleges Ofgem's tar- gets around interruptions to service and cus- tomer service are too lenient and based on old information. Third, it takes issue with changes to the Information Quality Incentive scheme. Fourth, the transitional arrangements to a new asset life policy. In its select commit- tee evidence, British Gas stated: "Ofgem has determined that 45 years is the appropriate asset life, longer than in previous price con- trol periods. However, a transition is applied British Gas attacks Centrica has complained bitterly about network costs before, but now its taken its case to the CMA. Ellen Bennett reports. Basil Scarsella, chief executive, UK Power Networks Chief executive of the UK's largest network group, Scarsella told Utility Week last October the RIIO settle- ment was "disappointing", high- lighting concerns about the amount of money Ofgem is clawing back on smart grids and real price effects Steve Johnson, chief executive, Electricity North West Having narrowly missed out on fast track status, Electricity North West could be seen to have had a raw deal on RIIO. In January 2014, Johnson told Utility Week: "We were very close, and the more we look at it, the closer it seems." SSE – Colin Nicol, managing direc- tor, networks Still relatively unknown in the network sector, Nicol took over from Mark Mathieson as head of SSE's network business last December, having previously been head of gen- eration development. Also subject to an Ofgem inquiry into competi- tion in its connections business, he has a tough first year in post ahead. Frank Mitchell, chief executive, Scottish Power Networks Frank Mitchell has said little publicly about Scottish Power's RIIO settlement. Last July, aer the dra determinations, he said in a statement: "Since the original submission in November, we now welcome the fact that Ofgem has recognised SP Distribution as the most efficient distribution network operator and the overall quality of our business plans." Phil Jones, chief executive, North- ern Powergrid While Jones normally fights shy of publicity, Northern Powergrid has broken ranks, appealing its RIIO settlement – though for very differ- ent reasons to British Gas. KEY PLAYERS