Issue link: https://fhpublishing.uberflip.com/i/961476
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 underway, 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, financial transparency and the delivery of innova ve ideas into business as usual opera ons. Why it ma ers: The final determina ons monopoly u li es receive from their price controls defini vely influence their ability to invest effec vely for customers and deliver returns for shareholders over the following regulatory period. Our survey found there is (marginally) more confidence in the RIIO regime (5.2 out of 10) to accommodate the scale of change facing networks in the next five to 10 years, than there is in the PR19 framework (4.8 out of 10) to accommodate the scale of change facing water companies in the me period to 2025. Both PR19 and RIIO2 are set to challenge these interests, with Ofgem and Ofwat squeezing the allowed 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 an historic low of 2.4 per cent – furthermore, under pressure from government, chairman Jonson Cox has proposed reforms to dividend policy which could cause a further crunch on investor payback during AMP7. But PR19 and RIIO2 are notable far beyond their impact on shareholder return – 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 benefits-focused innova on strategies. KEY FINDINGS l All respondents agreed business models will change increasingly over the next 15 years as a result of disrup on. l In the main, the market agrees that technology and regula on are the most disrup ve factors (both were rated 6.75 out of 10). It is thought regulatory disrup on will affect energy genera on and energy retail the most (just ahead of energy networks). l Confidence in the various regulatory approaches is not high – 4.8 out of 10 on average. l There is (marginally) more confidence in the RIIO regime (5.2 out of 10) to accommodate the scale of change facing networks in the next five to 10 years, than there is in the PR19 framework (4.8 out of 10) to accommodate the scale of change facing water companies in the me period to 2025 l Government and local authority ac ons are said to be crea ng both posi ve and nega ve disrup on – some respondents said there was a lack of focus due to Brexit, but others said the government would provide both the nudge factor and regulatory push to alter consumer behaviour and the usage and storage of electricity/launch of new business models. Commentary Laura Sandys, former MP, entrepreneur, and CEO of Challenging Ideas: "Disrup on is the new norm and regula on and policy are having to face in two different direc ons at the moment. It has to look back and deal with the real legacy issues while also having to look forward ensuring that innova on and be er consumer preferences are not squeezed out under the weight of managing the past mistakes of the sector. We need a very different form of regula on as we move forward – one that drives a more op mised system reducing waste within the system. We need to allow the market to find be er solu ons that might blur some of the ar ficial boundaries created at priva sa on, reducing the cost of the system thereby providing be er value to consumers. Much of the innova on will be driven by the range of people who could supply energy to the consumer – from their company car through to their white goods provider or their local authority or a home services company. We must not stop this happening as this will truly shape be er products and services to consumers. However, this "mixed" and "blurred" energy economy will pose new challenges to regula on to ensure that consumers are protected however they buy energy. The next era of regula on needs to open up consumer preferences – not second guess what they are – but shape a system that allows drivers of cost reduc on to put price pressure on the system. In addi on data flows and op misa on will have a radical impact on the cost and waste within the system. Data is revolu onary if it is allowed to play its role in reshaping how, what and at what cost energy is provided. It could not be a more exci ng me for energy and more importantly for consumers of the product." P R E S E N T S NETWORK / 36 / MARCH 2018