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UTILITY WEEK | 22ND - 28TH APRIL 2016 | 23 Customers N etwork costs make up around 22 per cent of a dual fuel energy bill, or around £300 a year for the average customer. That 82p a day pays for the upkeep of over 1 million kilometres of electricity network and 272,000km of gas network. Network operators are used to a very high level of scrutiny on these costs, having gone through regular and thorough price control negotiations with Ofgem since privatisation in the 1980s and 1990s. Customers today pay 17 per cent less in real terms for their networks than they did when the sector was state owned. Look- ing ahead, network costs are projected to remain flat in real terms into the 2020s, while Decc estimates that investment will reach up to £41 billion over the same timescale. While costs have fallen, levels of service have improved dramatically. Power cuts have reduced by 30 per cent since 2002, and the transmission and gas distribution networks are over 99.9 per cent reliable. DNOs are meeting the challenge of a rapid increase in renewables connections, having connected 11.5GW since 2005, largely without imposing additional costs on bill payers. Gas network operators have made over 27,000 new connections to fuel-poor households. This high level of network performance and service is reflected in the consistently high levels of customer sat- isfaction, which is over 8/10 for network companies and is monitored by Ofgem. This level of customer satisfac- tion would be impressive in any sector and companies are justifiably proud of these scores given the focus on customer service in the energy industry. Under the RIIO (Revenue= Incentives + Innovation + Outputs) regulatory model, introduced in 2013 and now in place across all network sectors, the emphasis is on delivering strong network performance and encouraging vital innovation, to ensure that today's and future cost to customers stays low. The high degree of scrutiny from Ofgem throughout the price control process has been supplemented by wide-ranging stakeholder engagement to ensure the networks are delivering outputs that cus- tomers want. Where customers aren't happy with what's being delivered, their feedback can directly impact company's revenue under the price control. At the same time, under the RIIO framework compa- nies are rolling out new innovations and smarter net- work solutions which will help the UK meet its climate change objectives at the most efficient cost for consumers over the coming decades. David Smith, chief executive, Energy Networks Association The CMA on fair prices In its provisional findings document, the CMA claims the big six energy companies overcharged domestic customers on average £1.7 billion a year between 2012 and 2015, because of a lack of switching. For dual fuel and single fuel electricity customers, this detriment was biggest among prepayment customers, followed by standard credit customers and then direct debit customers. The £1.7 billion figure was arrived at via the CMA's preferred "direct" methodology. This uses First Utility's and Ovo's retail tariffs as bench- marks. However, the large suppliers, Centrica in particular, have been vocal in expressing their disagreement with the suggestion that cus- tomers have been overpaying. Chief executive Iain Conn says: "We have provided strong evidence to the CMA that the UK energy supply market is competitive and achieving positive outcomes for consumers." SSE director of retail economics Richard Westoby agrees, and he tells Utility Week the CMA's analysis is "seriously flawed". The CMA's indirect analysis came out with an overcharge figure appreciably lower, at between £600 million and £1.1 billion a year, largely stemming from supplier inefficiencies. The view that customers are being overcharged by the big suppliers is largely backed up by the figures put out by Ofgem and the Depart- ment of Energy and Climate Change. Both the government and the regulator say the 70 per cent of customers who have never changed their tariff could save more than £200 a year if they switched. MB Preventing market manipulation W hether or not consumers are paying a fair price for power partly depends on whether suppliers are themselves paying a fair price in the wholesale market. If other participants are manipulating the market, they probably aren't. According to Ofgem's most recent review of the market, there is little room for manipulation from generators altering their output, because participants just aren't big enough to exert significant influ- ence. The review said that in the preceding year (2014) the largest player was EDF Energy, accounting for more than a quarter of total generation. However, with most of the company's generation coming from inflexible nuclear plants, it said it was unlikely that EDF could "exert market power by withholding electricity". Ofgem also said there were few instances of "pivotality", where a given company's portfolio of power stations is needed to clear supply and demand in a particular period – at least on a national level. It did say there was more scope for pivotality on a sub-national level, such as in Scotland. The market can also be manipulated though by traders without any control over generating assets. Up until recently, the energy mar- ket has been very opaque, making it difficult to assess whether this has happened. A significant majority of trades are over-the-counter (OTC), meaning they take place outside of exchanges. Price-report- ing firms contact traders to get information on such trades to calcu- late a wholesale price, but it is up to traders to report information accurately. Things will have changed somewhat with the introduction of new reporting rules as part of the Regulation on Wholesale Energy Market Integrity and Transparency (Remit). The European legislation was introduced in 2011 and in October the first tranche of reporting rules came into force, requiring traders to report all exchange-based trades to the European Agency for the Co-operation of Energy Regulators. The second tranche took effect earlier this month and required trad- ers to also report OTC trades as well. It means Ofgem, which enforces the regulations in the UK, should now have more accurate information available. Since Remit was first introduced in 2011 only two penalties have been handed down by regulators, and both instances occurred else- where in Europe. That could, of course, change with the introduction of the new OTC reporting rules. TG Networks deliver more for less The transporters of energy have a strong story to tell. Opinion David Smith