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Policy & Regulation UTILITY WEEK | 4TH - 10TH MARCH 2016 | 13 Analysis T he new model for regulating network companies' outputs and allowed rev- enue, RIIO (revenue = incentives + innovation + outputs), is fixed for eight years until 2021. It was designed to give net- work companies the security to make long- term investment to benefit consumers and improve service. But a one-off window of opportunity is fast approaching to review certain elements of the price control, in the form of a mid-point review (MPR). The energy industry is divided over whether an MPR is needed. Regulator Ofgem has signalled its intent to hold an MPR for transmission (T1) to address several issues, but not for gas distribution (GD1). Network companies welcome Ofgem's findings for gas distribution, but claim the issues on the transmission side would be better addressed through other mechanisms. British Gas and Citizens Advice are call- ing for an MPR across the board, pointing to consistent underspend by networks and overachievement against targets as warrant- ing investigation. British Gas, unsurpris- ingly given its challenge of the price control through the Competition and Markets Author- ity (CMA), has criticised the entire nature of the consultation, calling Ofgem's approach "restricted" and "likely to lack credibility". Ofgem will make its decision on an MPR this spring. The mechanism of an MPR was intro- duced to allow outputs to be reviewed if changes could be justified because of govern- ment policy, or if new outputs were deemed necessary to ensure the needs of consumers and other network users were still met at the end of the sizeable eight-year period. It does not provide the opportunity to re- open the RIIO-T1 and GD1 price control to change the key financial parameters, such as cost of capital. The case for a T1 MPR Ofgem has identified certain issues it thinks could be addressed within an MPR, includ- ing the network output measures, the cus- tomer and stakeholder incentive mechanism, and the strategic wider works submissions. British Gas has pointed to the fact that total expenditure for transmission is expected to be £1.8 billion less than allowed for, which it says is "not necessarily from efficiency, but from spending no longer being needed due to events out of the net- work's control". It has also called for a recalibration of output measures unless Ofgem can publish "firm evidence of genuine high performance" against virtually all the output measures by all companies. Citizens Advice said the average return on investment for network companies in T1 and GD1 is forecast to be 9.4 per cent, which is "well in excess of what appears appropriate for such low-risk investment". Haven Power said the price control is fail- ing to increase the stability of allowed rev- enues and ultimately Transmission Network Use of System (TNUoS) charges, which is raising costs for consumers. Arguments against a T1 MPR The Energy Networks Association (ENA) said the proposed scope of the MPR for T1 risks the intended longer term certainty by splitting it into two shorter four-year peri- ods. Transmission operators (TOs) do not think the issues identified by Ofgem justify a review "on the scale proposed". They urge Ofgem to "consider the longer term customer interest… and not just the short-term ben- efits within the last four years of this price control". The ENA added that changes witnessed since the start of the control are within the range of uncertainty anticipated, and although TOs acknowledge that new out- puts are evolving in some areas, such as onshore competition, many of these are still in the policy development stage and their full impact is uncertain. The ENA said "consequently, they may best be dealt with outside any mid-period review once the impacts are better known and using existing mechanisms". It said the inconsistent mechanism for investment in T1 for the delivery of outputs in T2 requires guidance rather than a MPR Division on mid-point review Regulator Ofgem has signalled its intent to hold a mid-point review for transmission, but not for gas distribution. The energy industry is divided over whether either is needed, says Lucinda Dann. and "dealing with these issues through exist- ing mechanisms could provide the same benefits for customers and be a better use of limited resources for Ofgem". For and against a GD1 MPR British Gas identified the exit capacity incentive, the broad measure of customer satisfaction and the iron mains reduction programme as potentially being issues an MPR could address. Citizens Advice said a review should be conducted to investigate the "exceptional financial returns" experienced by gas distri- bution networks (GDNs), which Ofgem has indicated is "not rewarding actions taken by networks themselves". Ofgem suggests that £840 million of GDNs' outperformance relates to uncontrollable factors, such as the level of real prices, fewer new connections due to the economy in the first year and a relatively mild winter reducing the adverse effects of cold weather on network assets. However, the majority of feedback to the consultation on an MPR for GD1 agrees with Ofgem's findings. The ENA said: "GDNs con- sider that the outputs set in final proposals remain effective measures of GDN perfor- mance. In addition, GDNs are not aware of, or received any stakeholder feedback to sug- gest, any new outputs which are required." Criticism of the consultation British Gas has slammed the entire consul- tation, criticising Ofgem's approach of pre- senting just the issues it sees as warranting an MPR. "In pursuing this approach, Ofgem is effectively depriving itself of the ability to be adequately equipped when determining whether price controls are set in a way that genuinely maximises efficiency in accord- ance with Ofgem's duties and obligation," it said. British Gas has previously taken issue with the price control, wiping £105 mil- lion off the amount of revenue networks are allowed to recover through the price control by referring it to the CMA last year. Four out of five of its grounds of appeal were dismissed, however.