Hard Times

Photo by Emma Matthews on Unsplash

On 31 May 2019, Ofgem published its RIIO-2 Sector Specific Methodology Decision documents. These documents set out the framework that will guide transmission and gas distribution companies as they prepare their business plans. Many commentators will focus on the policy decisions contained in these documents. And there is much to say about those decisions. However, in our view, there is also a lot to say about Ofgem’s process.

We have had the privilege of advising some 20 price control teams over the last 30 years. We have learned that successful outcomes rely on clear policy thinking and an effective process. Price controls are huge endeavours for the companies and the regulator. To achieve a good outcome for consumers, the regulator needs to make the process as predictable and efficient as possible.

Regrettably, Ofgem’s RIIO-2 process is working against this. The process has made it harder for companies to develop the high quality business plans that their customers and other stakeholders expect.

The worst of times

The timeline for RIIO-2 is challenging, particularly when compared to other price control processes (see below).

Ofgem’s methodology decisions were published only a month ahead of the date that companies are expected to issue the first version of their plans (1st July). A few days later, on 3rd June, Ofgem published updated guidance on the content of these plans.

Companies have only a few weeks to consider how they will respond to wide-ranging policy decisions and new requirements. In stark contrast, the document that set out Ofwat’s decisions for the water industry price control was published eight months before the water companies needed to issue their plans.

Ofgem’s Business Plan Guidance document contains a bundle of new requirements. It will be impossible for the companies to address many of these new requirements in time for the 1st of July.

A tale of two CEGs

For RIIO-2, Ofgem has created new forms of engagement. Companies have been asked to establish User Groups (in the case of transmission) and Customer Engagement Groups (in the case of gas distribution). The regulator has also established a RIIO-2 Customer Challenge Group. These are welcome developments.

However, despite the fact that the User Groups and Customer Engagement Groups have been running for over six months, they have only recently agreed the criteria they will adopt when they challenge companies’ plans. There is a significant risk that their work has been and will be inconsistent.

Great expectations

Ofgem has set a high bar for customer engagement and board involvement in the business planning process. But it hasn’t allowed the companies enough time to do this properly.

Engagement and board governance cannot be rushed. Yet, Ofgem expects the companies to issue three versions of their plans – on the 1st July, on 1st October and on the 9th December. Comments on the 1st July plan are only expected from the CCG in the middle of August. This allows the companies only a few weeks to update their plans in the light of the CCG’s challenges.

Moreover, developing a business plan is an iterative process. The first version of any plan will inevitably be improved upon in subsequent iterations. Yet, there is ambiguity about the status of each version of the companies’ plans. Some of the engagement groups have unrealistic expectations about the status of the first version of the plans.

Comparison of Price Control Timelines

Procrastination is the thief of time

Alongside their business plans, the companies need to submit a series of tables that contain data requested by Ofgem. These tables are unrealistically voluminous and are still under development. Ofgem expects to update the data templates in September, little more than two months ahead of the final submission of the plan. And Ofgem’s financial model (which companies will need to use in order to determine the financeability of their operations) is also still being built.

Why does this matter?

Ofgem has set up a rigorous set of processes to ensure network companies deliver value for customers. The regulator expects increased customer and stakeholder engagement, and greater challenge.

However, at the same time, Ofgem has undermined companies’ ability to deliver, by not allowing sufficient time for the companies to complete engagement activities and their internal governance processes, and by introducing new requirements and policy decisions late in the day.

Poor process will weaken Ofgem’s hand. Policy decisions will be undermined by the ability of companies to argue the price control was poorly executed. All of this will work to the disadvantage of customers.

It is too late to make changes to the transmission and gas distribution price control process. But, for the upcoming electricity distribution controls, Ofgem should attach more weight to running an effective process and to the burden it imposes on the companies it regulates. The companies need space and clarity to do what is best for customers.