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12 | 22ND - 28TH SEPTEMBER 2017 | UTILITY WEEK Policy & Regulation Analysis O fgem fired the starting gun on the all- important planning for the next regu- latory settlement, RIIO-2, in July. It's early days yet – the current price controls for gas and electricity transmission (RIIO-T1) and gas distribution (RIIO-GD1) networks run until 2021, while the electricity distribu- tion price control (RIIO-ED1) runs until 2023. But with so much up for debate, planning needs to start early. The industry consensus is that RIIO-1 has so far delivered on its promises. The annual reports published in February this year showed that networks are driving up service levels – earning many millions of pounds in regulated rewards – while also underspend- ing their investment allowances. However, this success must be taken in the context of the row over network returns, which shows no signs of dying down. Ear- lier this month, the Economy and Climate Intelligence Unit claimed networks were making "unusually high" profits of 32 per cent – a claim based on analysis which the Energy Networks Association (ENA) branded "deeply flawed". With Dieter Helm's cost of energy review looking at the whole value chain, network costs are sure to be in the spotlight for the next few months at least Against this complex and shiing back- drop, the regulator must seek to develop a framework that will satisfy both the net- works and their critics while delivering pro- tection and fair value for customers. To start the process, Ofgem asked networks for their views on the key issues the next framework must address. The consultation closed on 4 September – here, Utility Week rounds up responses on seven of the biggest areas of debate: 1. What's a fair return for a regulated monopoly network? It comes as little surprise that the networks all felt the returns they are getting under RIIO-1 are fair – nor that they declined to put a number on the "right" level of profit. Cadent mounted a particularly robust defence of its returns, arguing: "The finan- cial returns seen so far in RIIO-GD1, with some companies achieving low double- digit returns, have been the result of GDNs responding to the incentives within the regime to deliver significant service improve- ments whilst also driving cost reductions for customers, with 37p in every £1 of efficiency savings being returned to customers within the control period. "If network companies had not responded to these incentives, then they faced signifi- cant financial penalties which would have seen their financial returns fall to around or below the cost of debt." Cadent acknowledged that it can be diffi- cult for customers to see the value they are receiving for the returns made by networks, suggesting: "At RIIO-GD2, by aligning net- works' financial performance with recognis- able outcomes which can be observed and understood by customers it will help demon- strate that they have been value for money." National Grid Gas and National Grid Elec- tricity Transmission (NGG & NGET) have a similar suggestion: "To achieve greater levels of legitimacy we think the key issues for the price controls will be the calibration of per- formance benchmarks, better transparency and understanding of the risks managed by networks to ensure commensurate rewards are given." 2. How should the cost of capital be set? Setting a fair cost of capital that reflects the current low-interest environment while maintaining long-term financeability is a challenging issue for all regulators – and How tough should RIIO get? Ofgem fired the starting gun on the next regulatory settlements with a consultation. The networks have responded. Ellen Bennett looks at the areas of debate. EIGHT-YEAR RETURN OF REGULATED EQUITY 14% 12% 10% 8% 6% 4% 2% 0% -2% East London North West West Mids NGN Scotland Southern WWU Current view of RoRE OPENING POSITION IQI ex-ante reward/penalty Cost of equity - 6.7% PERFORMANCE (+) (-) Tax allowance retained within deadband payments under guaranteed standards Discretionary reward scheme Environmental emissions incentive Exit capacity incentive Shrinkage roller incentive Broad measure of customer satisfaction Totex incentive mechanism Fines and redress payments Source: RIIO-GD1 Annual Report 2015-16