WET News

w w w . u t i l i t y w e e k l i v e . c o . u k NATIONALISATION AND ALTERNATIVE MODELS While many signifi cant regulatory disrup ons are today emana ng from exis ng regulatory bodies and their evolving frameworks, it must be acknowledged there is also increasing scope for these ins tu ons themselves to be irrevocably disrupted in the near to mid-term future. Labour's pledge to rena onalise u li es – including energy supply, energy networks and water networks – has created the scope for a radically diff erent future for the sector, one that would unwind almost 30 years of work to make private ownership and compe ve markets deliver cost- eff ec ve and reliable u lity services. Details have so far been scant on how Labour's rena onalisa on plans would work in prac ce, but a January report on alterna ve models of ownership suggested a blend of na onal state, local and community ownership for Na onal Grid and other electricity and gas sector infrastructure. The boards running the companies would be split between state appointees, local and devolved administra on government nominees, consumer, and employee representa ves. Despite the protesta ons of shadow chancellor John McDonnell, it's likely rena onalisa on would be a costly business and as Sco Corfe, chief economist at the Social Market Founda on (SMF), says it is "pre y unclear" how exis ng owners would be compensated. The SMF published a report in February seeking to quan fy how much Labour's plans to take back control of water companies would cost and concluded that rena onalising this sector alone could cost £90 billion. Much to the chagrin of u li es leaders – who argue vehemently in favour of priva sa on as a proven route to increased investment in infrastructure and service improvement – polls and consumer surveys show strong public support for Labour's rena onalisa on policy. In recent research conducted by U lity Week in partnership with Harris Interac ve, over a third of respondents supported rena onalisa on. With the popularity of the current government eroding, the likelihood that Labour will get a chance to make good on its promises is increasing – and credit ra ngs agencies such as Moodys and S&P Global have issued warnings accordingly. THE DISRUPTION: NEW REGIMES FOR MONOPOLY NETWORKS What's the deal: With business plans for PR19 due this September and consulta on on the RIIO2 framework under way, price controls are now domina ng the thoughts and me of senior teams at regulated u li es across the UK. Ofgem and Ofwat have both been clear that their next price controls will be tough – including higher expecta ons for customer focus, fi nancial transparency and the delivery of innova ve ideas into business as usual opera ons. Why it ma ers: The fi nal determina ons monopoly u li es receive from their price controls defi ni vely infl uence their ability to invest eff ec vely for customers and deliver returns for shareholders over the following regulatory period. Both PR19 and RIIO2 are set to challenge these interests, with Ofgem and Ofwat squeezing the cost of capital and expressing in no uncertain terms that shareholders should expect lower returns over the next period. Ofwat has set the weighted average cost of capital for PR19 at a historic low of 2.4 per cent – furthermore, under pressure from government, chairman Jonson Cox has proposed reforms to dividend policy that could cause a further crunch on investor playback during AMP7. But PR19 and RIIO2 are notable far beyond their impact on shareholder returns – both frameworks seek to build on some seminal changes to regulatory approaches introduced in PR14 and RIIO1 respec vely, especially with regards to regulatory expecta ons for customer engagement in the business planning process and for customer benefi ts-focussed innova on strategies. There are also brand new elements included. For example, Ofwat has introduced Direct Procurement for Customers (see P16), overhauled customer sa sfac on metrics and put forward a new set of common performance measures to push companies to up their game on key opera onal and service factors. Over in energy, Ofgem's RIIO2 consulta on proposes to revert to the fi ve-year mescale used under the previous regulatory approach – DPCR – or possibly to introduce an even shorter period in apprecia on of the level of uncertainty and radical change manifes ng in the energy system. Changes like these will mean organisa onal scrambles to ensure their impact on investment planning, risk exposure, opera ons, internal processes and repor ng are fully understood and prepared for. THE DISRUPTION: PRINCIPLES-BASED REGULATION What's the deal: In 2014 at U lity Week's Congress event in Birmingham, Ofgem chief execu ve Dermot Nolan announced that the regulator was embarking on a change process in its approach to regula on which would see prescrip ve rules binned in favour of "principles-based" frameworks. Se ng out his stall, Nolan envisaged a smaller licence for energy suppliers, gravita ng around the idea of "trea ng customers fairly" rather than compliance with specifi c processes or requirements. He said, in the new world of principles-based regula on, the onus would be on companies to interpret whether their products, pricing and customer service arrangements lived up to the ideal of fair treatment. Why it ma ers: A complete transi on to principles-based regula on would be a radical shi , with big implica ons for the risk exposure of u li es, enforcement measures and service diversifi ca on. When principles-based regula on was fi rst kick-started, there were also concerns from consumer advocates that the shi might so en a regulator's ability to penalise companies for mistrea ng customers or gaming the market. Ofgem has been keen to counter such concerns and stand fi rm by its convic on that a principles-based approach is the best way forward. Recognising the concerns of cri cs, however, it has also more recently emphasised that a blended approach is no doubt required, with hard rules to outlaw defi ni vely nega ve behaviours and principles to encourage crea ve thinking about how to achieve posi ve consumer outcomes. Even this ideal has arguably been cast into doubt, though, by poli cal pressure to introduce a range of price caps in the energy retail market. Similarly, in the water sector, recent sugges ons that Ofwat should be given enhanced powers to control water companies' fi nancial arrangements undermine the idea that a core principle of transparency can be eff ec vely regulated without a prescrip ve rulebook. Both Ofgem and Ofwat claim to stand by their principles-based, hands- off approach to regulatory evolu on. But their ability to maintain this line against a poli cal storm that demands heavy-handed interven on may become increasingly diffi cult to reconcile with this goal. w w w . u t i l i t y w e e k l i v e . c o . u k I N A S S O C I A T I O N W I T H wwtonline.co.uk | APRIL 2018 WET NEWS 17

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