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UTILITY WEEK | 22ND - 28TH SEPTEMBER 2017 | 13 Policy & Regulation one Ofwat is also grappling with in its next price review, PR19. Ofwat has concluded that using historic data to indicate future returns is not valid in the current environment – a conclusion, based on analysis by PwC, which many of the water companies have taken issue with. Energy networks agree that the unique economic environment necessitates a rethink of the cost of capital. NGN welcomes Ofgem and the UK Regulator Network's decision to commission an expert report on the issue, and says: "There is a popular view that recent evidence of unprecedentedly low risk-free rates coupled with bewilderingly high Market-to-Asset (MAR) ratios seemingly suggests an imbalance between returns the market requires and the cost of capital RIIO-1 settlements offer. However we would argue that high MARs may not necessarily signal that the cost of capital, allowed in RIIO-1, is too high. Premia that investors are prepared to pay depend on investors' expectations of the overall future operating performance of a company and costs of financing… A large part of the valuation premium could there- fore be explained by bidders' optimism bias rather than poorly calibrated Wacc parameters." NGG & NGET issue a plea for investor confidence, and warns that long-term deci- sions shouldn't be based solely on short-term economic factors: "As network investments are long term in nature, the allowed return should reflect both the long-term and short- term risks and uncertainties faced by com- panies. It is therefore imperative that, in setting the allowed cost of capital, regula- tors do not focus solely on short-term market conditions." 3. Should the price control period stay at eight years? One of the heavily trailed questions about RIIO-2 is its length, with Ofgem indicating that, given the uncertainty arising from the energy transition, a shorter control may be better. WPD argues for the retention of an eight- year price control, saying: "It is very difficult for network companies to innovate and see results in time periods shorter than eight years. It would be ideal if network companies are given targets that align to customer needs, and then were le to deliver those targets in a way that it is economically favourable." Cadent supports an eight-year price con- trol for gas, but suggests that shorter peri- ods may be suitable for electricity, and that the two do not need to be the same length: "There is less uncertainty now in the GDNs' role than when RIIO-1 was set, however we can see that there is still significant uncer- tainty in what the electricity networks will need to deliver, which may warrant a differ- ent approach." National Grid Electricity System Opera- tors (ESO) agrees that "an eight-year price control may not be right for the ESO". Nearly all consultation responses seen by Utility Week call for greater uncertainty mechanisms. As NGG & NGET says: "The critical factor for the RIIO framework review is… whether uncertainty mechanisms can be designed to deal appropriately with these uncertainties rather than focusing on the length of the control period itself." 4. Should the price controls be aligned? There is a school of thought that to deliver whole-system planning, the price controls for transmission and distribution – and per- haps those for electricity and gas – should be aligned. Opinion among the networks is divided on this question. NGN supports the align- ment of the electricity transmission and distribution controls, and says "we believe there to be an equally strong case for con- sideration of aligning the gas and electricity distribution controls". Cadent suggests "customer outcomes, outputs, incentives and innovation funding" should be aligned, but says "this does not necessarily require the alignment of price control start points and durations". WPD supports the alignment of transmission and distribution controls, while National Grid suggests "further work is required to set out and attempt to quantify the advantages and disadvantages". 5. Stakeholders The networks agree with Ofgem that cus- tomers, and their representatives, should be engaged throughout the price control process. ENA speaks for its members in its umbrella response to the consultation, which suggests setting up expert panels, including customer representatives, to oper- ate throughout the next price control period, and contribute to the assessment of RIIO2 business plans. WWU suggests communicating with customers in new ways: "We recommend the use of technology (such as apps, media tools, polls, etc) to encourage wider engage- ment and reach more stakeholders… We rec- ognise the need for a variety of engagement techniques to ensure a wide range of stake- holders are consulted, particularly hard-to- reach consumers, those in fuel poverty and future bill payers." 6. Innovation Innovation funding is one of the success sto- ries of network regulation, and the networks all speak positively about it and call for its continuation, in one form or another. WPD says: "The recent and historical innovation stimulus available to DNOs has enabled the UK to lead on innovation within the electricity industry worldwide. It has allowed a higher level of risk to be taken in trying new techniques and technology and allowed DNOs to simultaneously develop a broad pipeline of innovation projects. It has enabled earlier and faster development of new techniques and technology than would have been the case without the stimulus and given the platform to encourage deployment of these within companies." Cadent also praises the impact of innova- tion funding, but has some suggestions for improvement under RIIO-2: "The combina- tion of a specific innovation stimulus and the incentives inherent in the RIIO model has been a success in RIIO-1 but there is scope for improvements around flexibility, reducing the administrative burden and cost. The RIIO framework could be evolved further with increased cross-sector measures, including innovation, to ensure that the most effective and efficient investment is undertaken to drive the delivery of the outcomes required by customers." 7. Fast track Opinion is divided on whether the fast-track option included in RIIO-1 should be con- tinued to RIIO-2 – and it is no surprise that WPD, the single company fast-tracked last time round, should support the model. It says: "Fast-tracking should be retained for all sectors. The potential to be fast-tracked incentivises companies to submit a high quality business plan to Ofgem. It provides significant benefits to customers in that it encourages companies to reveal information earlier in the process and drives efficiencies and improves proposals for delivery from the companies remaining in the process." Other networks are not so sure. Cadent argues: "Ofgem should take the time to focus on ensuring that benchmarking, outcomes, measures and customer value assessments are fit for purpose rather than retaining the fast-track process. Some of the main chal- lenges seen during RIIO-GD1, and other RIIO regimes, are as a result of there not being enough time for Ofgem to work with network companies and other stakeholders to design, develop, justify and implement the measures within the framework. By removing the fast- track process it will enable more time for the work to take place."