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UTILITY Week 2nd June 2017

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10 | 2ND - 8TH JUNE 2017 | UTILITY WEEK Policy & Regulation Water companies must ensure their business plans for PR19 – the regulator's next price review (in 2019) for the 2020-25 period – are "real and meaningful" and not distorted by "optimism bias", a senior figure at South West Water has urged. Speaking at the Utility Week Live conference at the end of May, Mark Worsfold, the director of asset management WATER PR19 plans must be 'real and meaningful', and avoid optimism bias at South West Water, said the "optimism bias" associated with business planning needed to be challenged to "make sure the plan reflects the real values and benefits for customers". "Optimism bias is where, going into a price review particularly, you see a desire within the companies that every particular problem is the most important priority within the business, and that all of these things can be accommodated within the next five-year business plan, and that the benefits associated with a particular aspect are far greater than actually exist," he said. He added that, in order to get things into a business plan, a lot of people will try to "get the costs down and hype the benefits up". This week RIIO jigsaw missing a stakeholder piece Ofgem should be more proactive at seeking the opinions of those affected by its price reviews Ofgem must take a more proac- tive approach to stakeholder engagement by seeking out affected parties and informing them about key issues, accord- ing the head of network regula- tion at British, Gas Andrew Manning. "I don't think it would be unfair to characterise the most recent RIIO price controls as effectively being a negotia- tion between network companies and Ofgem," he told delegates at Utility Week Live last week. "We need to make that more of a general conversation and involve stakeholders." He said networks had done an excellent job at finding out what customers wanted. But, he added, "it's not that part of the process that I'm talking about. It's the part that comes aer – when Ofgem is looking at setting its proposals and agreeing settlements with the networks. That's where we need more stakeholder engagement." In March 2015, British Gas appealed against the RIIO ED-1 settlement published by Ofgem a year earlier, on the basis that it was too generous. Speaking at Utility Week Live's networks theatre, Manning said the Competition and Markets Authority (CMA) had allowed the appeal to proceed partly because of the way in which Ofgem had dismissed concerns raised by British Gas. "At no part in that process was it ever explained why we were wrong," he claimed. Although the CMA dismissed four out of the five grounds of appeal put forward by British Gas – order- ing the firm to pay costs – it also concluded in its final report that Ofgem should "engage stakeholders who criticised the process when developing future target- setting approaches". TG ENERGY Flexible price controls needed for uncertain future The RIIO2 price controls must be flexible enough to allow net- works to adapt to an uncertain future, delegates at Utility Week Live 2017 have heard. Rigid regulations leave networks "straight-jacketed" and unable to respond effectively to the rapidly changing energy landscape. "There's a lot more uncer- tainty going forward so we need a RIIO2 settlement that can evolve," said Simon Harrison, group strategic development manager at consultancy firm Mott MacDonald. He said regulations must be "flexible" and "agile" to prevent networks from becoming locked into outdated business models, which cannot accommodate cost-saving innovations, particu- larly those which involve greater risks. Stephen Hall, lead researcher for the Energy Research Part- nership's Utility 2050 project, told delegates in the networks theatre that innovative business models could account for up to 30 per cent of the value of the energy market by 2050. ENERGY Labour considering 'limited' energy cap The Labour party is exploring moves to rail franchise-style fixed-term network licences and a "limited" cap on household bills, Alan Whitehead, its energy spokesman, has said. In an interview with Utility Week, he said Labour aimed to "regain control" of energy supply networks by exploring the introduction of cut-off dates for national and regional network operators' licences. Whitehead added that Labour, if elected, would introduce a "temporary" price cap to keep the average dual-fuel household energy bill below £1,000 during the transition to a "fairer system". The cap would take account of wholesale costs, he said. "Once reset, the market would probably have a cap on it, but a looser cap in terms of different operating market conditions." WATER UK and Irish bathing sites worst in EU The UK has one of the highest rates of poor quality bathing waters in Europe, according to an EU report. The European Environment Agency and the European Commission said 20 bathing waters in Britain (3 per cent of the national total) were poor, as were six in Ireland (4 per cent of the national total). A total of 96.3 per cent of more than 21,000 coastal and inland bathing water sites reporting on water quality in 2016 met the minimum quality requirements under the EU's bathing water directive. British Gas unhappy with networks settlement The consequence of this approach, he warned, was inherently inaccurate business planning. "There is a real optimism bias associated with people hyping those things," he said. "The reality is that if you had a business plan that contained all of those things, a) you couldn't deliver it, and b) it's going to cost you a lot more to deliver it."

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