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The Topic: CMA investigations UTILITY WEEK | 4TH - 10TH SEPTEMBER 2015 | 13 T he CMA is investigating network price controls because the issue was raised by British Gas as an "interested third party" in early March. The supplier said Ofgem's £17 billion eight-year price settle- ment for RIIO-ED1 was too generous. Northern Powergrid, one of the distribu- tion network operators (DNOs) affected, also forced a referral when it rejected its price control – for being too low. So what are the specific bones of conten- tion between British Gas and the DNOs? Double-recovered revenues. British Gas says Ofgem chose an "inappropriate" mech- anism to return revenues relating to certain excluded services that were double-recov- ered in the previous price control period. The DNOs say the issue concerned the "treatment of costs", meaning it would be inappropriate to make any cash payment to consumers. Incentive targets for IIS and BMCS. Brit- ish Gas objects to the interruptions incentive scheme (IIS) and broad measure of customer satisfaction scheme (BMCS) targets set by Ofgem for RIIO-ED1, saying they are based on outdated information and are too lenient. The DNOs claim IIS and BMCS deliver "significant efficient improvements (30 per cent) in interruptions and restoration performance". Change to information quality incentive (IQI). The IQI was introduced in the DPCR4 price control (covering 2005-10) to encourage DNOs to provide business plans that reflect best available information about future effi- cient expenditure requirements. British Gas disputes Ofgem's decision to make changes to the matrix aer the DNOs had submitted their business plans, which it argues gives an "undue financial benefit" to DNOs. The DNOs say the IQI has resulted in more efficient business plans being submitted that were £743 million lower than originally. Change in asset life policy. In 2010, Ofgem decided extend the regulatory depreciation period of assets. Before RIIO-ED1, assets were assumed to have a 20-year life for the purpose of allowed depreciation, even though the physical life of assets can be much longer. British Gas says the transitional arrange- ments Ofgem is putting in place to imple- ment its change in asset life policy are "harmful to the interest of consumers", both existing and future. The DNOs argue that Ofgem's deci- sion to impose transitional arrangements is an "appropriate and standard regula- tory response" to the potential "cliff-edge" its policy change could otherwise create in DNOs' revenues. Change in cost of debt indexation. Brit- ish Gas says Ofgem was wrong to change its approach to the assessment of cost of debt in its dra determinations by extending the trailing average (a measurement of a com- pany's financial health) to beyond ten years. The DNOs argue that British Gas has "misunderstood the statutory framework" under which Ofgem operates, taking an "overly simplistic and short-term view". LV The Goldilocks settlement Distribution network operators are also in the CMA's cross-hairs, driven by British Gas, which says their price control was too generous, and Northern Powergrid, which says its was too mean. ANALYSIS The DNOs say British Gas's accusations lack any foun- dation and are based on ignorance, but the supplier is unmoved. The distribution network operators (DNOs) stand to lose a lot if the pendulum of the CMA's price control probe swings in favour of British Gas, but in their initial submis- sions they unite to put up a strong fight. Aer a U-turn from the CMA, brought on by a warning from former Energy and Climate Change Committee chair Tim Yeo against a "lack of transparency", the initial submissions to its inquiry into price controls were published last month. It is now saying it will not publish a provisional determination. Could this be because the outcome will be a foregone conclusion? The gist of the submissions is that British Gas is wrong, has "erred" and its arguments are "without foundation". The supplier has been collectively slated, and the CMA advised to dismiss the appeal and not grant the relief sought. The so-called slow-track DNOs put in a joint submission, and Scottish and Southern Energy Power Distribution put in a separate submission as an interested third party. Ofgem and SSE accuse British Gas of cherry-picking those parts of the price con- trol it does not support, in an "inappropriate and unacceptable" move. The DNOs also criticise the firm for having "misunderstood the issue generally" and making "erroneous allegations". It is widely thought that British Gas first tried to get the networks included in the CMA's central investigation into the energy market, and only aer it failed in that attempt made a referral itself as an "inter- ested party". Whether or not this is true, its determination to press home its accusations is beyond question. It is no surprise that the networks under scrutiny are vociferous in their attempts to protect their revenues. British Gas takes an equally hard line in its response to their submissions. "These complaints are hard to understand," it says. "Whatever the stand- ard of review that is to be applied, the nature of an appeal is that it requires the appel- lant to identify where the decision-maker has erred; the appellant cannot sensibly be asked to appeal against those aspects of the decision with which it does not take issue." As for the outcome of the inquiry, the networks will have to wait for the final deter- mination. The CMA has until 30 September to reach a decision. LV Jun 2015: Considering submissions and representa- tions before provisional determination 23 Jun 2015: Former chair of the energy select committee Tim Yeo advises CMA to publish initial submissions Jul 2015: Provisional determination notified 10 Jul 2015: CMA u-turns on decision to withhold networks evidence – says it will publish submissions but not provisional determination 7 Aug 2015: Submissions published, British Gas criticised for 'cherry-picking' 30 Sep 2015: Statutory deadline for final deter- mination Feb 2015: Publication of relevant working papers and annotated issues statement February/March 2015: Further hearings 6 Feb 2015: Bristol Water rejects its final determination, criticising Ofwat's "flawed modelling" Mar 2015: Deadline for all parties' responses/ submissions required before provisional findings 4 Mar 2015: Reference to the CMA made by Ofwat 10th Jul 2015: Provisional findings report and possible remedies 25 Dec 2015: Statutory deadline Nov to Dec 2015: Publish final report 3 Nov 2015: deadline for determination to be sent by CMA to Ofwat 17 Apr 2015: Bristol Water launches another attack on Ofwat's modelling 8 Jun 2015: Bristol Water's CCG tells CMA it does not trust Ofwat's wholesale cost model for PR14 10 Jul 2015: Publish provisional findings – Bristol Water claws back only £20m 3 Aug 2015: Bristol Water says CMA provisional findings are "unrealistic" 12 Aug 2015: CMA extends its six month investigation by two month. Apr 2015: Appeal management conferences conducted May/Jun 2015: Hearings with main parties and interested third parties 30 Mar 2015: CMA confirms that it will carry out a formal inquiry 31 Mar 2015: CMA appoints appeal panel, including Jon Stern as sole utilities expert 22 Apr 2015: Deadline for Ofgem and third party responses to notice of appeal 2015