The RIIO-2 Challenge Group report: useful, in part!

On 24 January 2020, the RIIO-2 Challenge Group published its report on the business plans produced by the transmission and gas distribution companies and the electricity system operator.

The Group was set up by Ofgem to provide challenge on behalf of existing and future customers. Their report is an important contribution to the ongoing RIIO-2 process. It will form a critical input to the forthcoming Open Hearings and will set the tone for the rest of the price review.

We think the report contains some valuable observations. But, we are concerned the Group’s findings are in danger of being misunderstood.

The Challenge Group identified important issues …

The Group think that six key issues should be addressed through the Open Hearings:

  • Whether the increase in totex proposed by the companies is justified.
  • The need for the ongoing programme to replace old iron mains.
  • The role the industry should play in helping the UK track towards zero carbon.
  • What the regulator should do to ensure company financeability.
  • The companies’ proposals to address customer needs.
  • The role the electricity system operator should play in the evolving industry.

Many of these issues are worth exploring. However, it feels very late in the process to be suggesting fundamental change to activities like the iron mains replacement programme. Likewise, whilst there may be issues to resolve surrounding the role of the electricity system operator, these should have been addressed before the RIIO-2 process began.

There is confusion about the standards the plans were expected to meet

The Group provides a summary assessment of the quality of the business plans. This has been presented in a RAG format. It shows a marked skew towards amber, amber-red and red ratings. Looking at this table, it is easy to form the view that the companies’ plans were poor quality … easy, but potentially wrong!

We and other commentators have already noted the considerable confusion about the standard that companies were being measured against.

Ofgem continued to update its guidance for the companies late in the process (indeed, the final version of the guidance was published less than six weeks before the plans were due to be submitted). The Group noted that this put additional pressure on their work schedule.

The regulator also failed to provide clear guidance to the Challenge Group, or to the company-specific Customer Engagement Groups (CEGs). This can be readily seen by comparing the assessment made by the Challenge Group and by the CEGs.

Unfortunately, only two CEGs assessed the quality of the company business plans using a RAG scoring system – the CEGs for Cadent and Wales & West Utilities (WWU) – a fact that highlights the lack of consistent guidance about what the CEGs were expected to do. The table below compares the summary provided by the Challenge Group with the summary provided by the Cadent and WWU CEGs. What is striking, is the fact that the CEGs had much more favourable views on the quality of the plans. Something has gone seriously wrong when different, independent groups established by Ofgem come to widely different views about the same document. We wonder how Ofgem will reconcile these views – will it simply ignore the views of one group?

Comparison or Challenge Group and CEG business plan assessments

The Group has not fully assessed the evidence

The Challenge Group say its assessment of business plan quality reflects “where we think the evidence provided in the Business Plan is good and the company proposals are acceptable”.

However, it seems the Group has allowed itself to form and publish views without the evidence to back up its opinions. Indeed, the Challenge Group is open that it has not been able to fully review the companies’ evidence. For example, the Group state they:

  • only carried out a “limited review of the extensive supporting material” submitted by the companies
  • were “unable to analyse” a number of the proposals put forward by the companies ‘as fully as they would have wished’.
  • had limited time to examine the engineering justification for investments, and
  • did not find Ofgem’s concept of Customer Value Proposition easy to apply.

Given this, it is not clear how they formed their views about the quality of the plans. We are concerned that the Group’s views may amount to no more than a comparison of the companies’ proposals against the Group’s distinctive view of what is acceptable. Our concern is amplified because, even after careful scrutiny of the Group’s report, we find it difficult to determine how the Group came to its conclusions.

Why does this matter?

Of course, there is room for improvement across all of the business plans – few people would argue otherwise. However, we do not think the Challenge Group report provides a reliable indication of the quality of the plans.

We sympathise with the Group’s position. They were working to a tight timetable and faced uncertainty. As they say, “we have found the timescale for the scrutiny process … challenging”, “late changes to sector methodologies … and the Business Plan Guidance from Ofgem have contributed to this challenge” and “some technical tools and support … were not available to us”.

The Group were right to highlight these challenges, and the limitations that follow from them. But, by drawing conclusions about the quality of the plans, based on a limited review of the evidence, we think the Group has done a disservice to the huge effort put in by the companies, the engagement groups, customers and other stakeholders who have contributed to the RIIO-2 plans. We wonder why the Challenge Group did not feel the need to meet the same evidential standards that it expected of the companies. And we question how Ofgem will use the Group’s report.

Stuart Cook, Managing Director