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UTILITY Week 9th October 2015

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12 | 9TH - 15TH OCTOBER 2015 | UTILITY WEEK Policy & Regulation Analysis A er six months of scrupulous exami- nation of Ofgem's networks price settle ment, the Competition and Mar- kets Authority (CMA) has spoken: no real change. The CMA published its final determi- nations on its inquiry into Ofgem's RIIO-ED1 price control framework for five of the distri- bution network operators (DNOs) at the end of last month. The outcome has seen Centrica subsidi- ary British Gas trounced, having achieved a meagre reduction in DNO revenue through charges of £105 million over the entire ED1 period. As UK Power Networks (UKPN) points out, this revenue adjustment per com- pany is proportional to the number of dis- tinct networks it operates, so is unlikely to have much of an effect. British Gas referred Ofgem's price settle- ment to the CMA in March this year, amid growing pressure on suppliers to reduce the costs they pass on to consumers. At the same time, Northern Powergrid sought permission to appeal against its RIIO-ED1 settlement on the grounds that it was too tough. The authority has dismissed four of the five grounds of appeal brought forward by British Gas, but has upheld one. It also dis- missed two of three grounds of appeal by Northern Powergrid, but upheld one relating to Ofgem's adjustments to reflect potential savings through smart grids and technologi- cal innovations. British Gas is looking on the bright side, insisting it is pleased to have "secured a £105 million saving for UK energy customers". But the modest victory came at a price for the big six supplier, which has been ordered to pay 80 per cent of the costs incurred by the CMA, and 60 per cent of Ofgem's costs in connec- tion with the appeal. Whitman Howard analyst Angelos Ana- stasiou says the dismissal of four of Brit- ish Gas's grounds of appeal has "no direct impact" on Centrica, but might have a "small negative impact" on energy firm SSE, whose subsidiary – SSE Power Distribution – is affected. "However," he adds, "we estimate that the potential impact here should be small, totalling circa £20 million over the price control period." Northern Powergrid has secured a minor victory of an increase of £11 million in its allowable revenue over ED1 – an amount also unlikely to affect its operations signifi- cantly when divided over eight years. However, the determination is likely to have a discernible effect on the wider elec- tricity sector, upping investor confidence and making future price settlement appeals more likely. UKPN chief executive Basil Scarsella believes the findings are "important for the confidence of investors" because they show the RIIO price control "can be relied on". Moody's senior analyst, Graham Taylor, tells Utility Week future price control appeals are likely to be a more regular occurrence now companies are allowed to "cherry-pick" individual elements of the review, reduc- ing the risk that favourable elements of the determination will be reopened. "The CMA will look only at the merits of their argument on the first point and prob- ably won't touch the second, unless someone else has appealed it or the issues are closely linked," says Taylor. Ofgem victorious The CMA reveals its final determinations on its inquiry into the regulator's networks price settlement. Lois Vallely reports. "The CMA found partially in favour of British Gas on one ground, but dismissed the other four grounds in Ofgem's favour. For Northern Power grid, CMA found in favour on one ground, but dismissed the other two. Ofgem will examine the CMA's decision in more detail, looking to learn lessons and improve its processes for future price controls." Ofgem spokesperson "We're pleased that the CMA has agreed with us that Ofgem was wrong about smart grid benefits. We didn't take the decision to appeal the price control lightly, but an important principle was at stake." John France, regulation director, Northern Powergrid "Our appeal to the CMA over the price controls for electricity distribution network operators has secured a £105 million saving for UK energy custom- ers. We welcome the decision and will continue to seek ways to work with Ofgem and the industry to achieve the best value for our customers." British Gas spokesperson "Out of what is close enough to £20 billion of revenue, the CMA found an adjustment of around £100 million over eight years. That is an overwhelming endorsement of the regulatory regime." Basil Scarsella, chief executive, UK Power Networks "Regulatory deals have been over- generous to the networks in the past, allowing them to earn high returns for a very low-risk monopoly business. We're pleased the CMA has picked up on some of these issues and delivered close to £100 million in net savings for consumers over the next eight years." Audrey Gallacher, director of energy, Citizens Advice "As we stated in December 2014 when accepting the price control settlement, we remain committed to delivering improved network performance and customer service over the price control period while also providing a fair return to investors. The conclusion of the appeal process will allow us to focus on doing just that." Colin Nicol, managing director for networks, SSE Reaction BRITISH GAS: THE CHARGES 1. Double-recovered revenues allow DNOs to "over- recover" 2. Incentive targets for IIS and BMCS too lenient 3. Change to information quality incentive DNO revenue reduced by £105m over RIIO-ED1 4. Change in asset life policy "harmful to consumers" 5. Change in cost of debt indexation creates "additional costs for consumers" NORTHERN POWERGRID : THE CHARGES 1. Smart grid benefits: Ofgem "wrongly reduced its view" of DNOs' costs relating to smart grids DNO revenue increased by £11m over RIIO-ED1 2. Real price effects: Ofgem "did not use relevant com- parative data" to assess costs 3. Regional labour cost adjustments: Ofgem used "inac- curate data" to compare DNOs' costs

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