A busy month for CMA watchers

The past month has seen announcements on the three sets of appeals that should be on a Competition & Markets Authority (CMA)-watcher’s radar – the granting of permission on the RIIO2 appeals, the final decision on PR19 in water and the decision on the rather obscure SSE code modification appeal.

RIIO2 appeals permission

Of surprising interest was the granting of permission for the eight RIIO2 appeals in which all the network companies have appealed against Ofgem’s decision on the cost of equity with most then appealing on a number of other issues as well.

The fact that the CMA has granted permission is not of itself a surprise. However, its decision makes clear that Ofgem had argued against the companies being granted permission on all but the central grounds around cost of equity and ongoing efficiency savings.

Ofgem had argued, for example, that the differences weren’t material or that past CMA decisions  – in particular the System Operator Northern (SONI) case on appeal rights – meant there was no prospect of success. The CMA argued in all cases that they needed to hear the full case before they could decide. They also made the point (in relation to SONI) that the CMA is not bound by its past decisions. Decisions will always depend on the particular facts of the case but this is also an important reminder of the way that the CMA panels work – and of particular relevance as energy companies look across to the PR19 decision.

More importantly, the CMA has made its permission conditional on the appeals being joined across companies where they are appealing on cost of equity, the outperformance wedge, ongoing efficiency or the appeals rights for in period decisions. This really makes sense. As I flagged last month the alternative was both unmanageable but also risked perverse outcomes of some companies securing changes and others not, depending how well they argued their case.

What is proposed is now much more manageable for Ofgem and the CMA but will create a real headache instead for the companies who will undoubtedly be required to agree a common set of arguments. The armies of lawyers and consultants that the companies have lined up will not be happy being shoe-horned into a common framework but it’s hard to see how it could have worked otherwise.

The CMA has also announced the panel for the RIIO2 appeals – an ex-Treasury civil servant, a lawyer and an accountant with significant regulatory experience. That seems a reasonable balance given the nature of the appeals but notably there is no overlap with the panel for the water appeal (although at working level there presumably will be). The chair is the same as on the SSE code appeal which may not give the companies much comfort given where that landed (see below).

PR19 water decision

The CMA’s final decision moved slightly from the provisional decision that was published last year but is broadly in line with the working papers on cost on equity that the CMA published in February. As such the decision had been well trailed.

Putting aside the detail, the core message remains that this was very much a judgment call around the right balance between long-term investment and short-term customer bill impact and where the CMA seemed to place more weight on the longer term.

As I’ve flagged previously it is not clear what qualifies the CMA to be a better judge of where that balance should sit than a regulator that is closely plugged into the ongoing public debate in these areas. This is the argument in favour of the energy appeals regime where the CMA is not able to over-turn an exercise of regulatory discretion.

Of course, it was not all about that balancing. The CMA’s view that financeability should be addressed by increasing the cost of equity not by adjusting the “pay as you go rate” (in effect bringing forward cash flows from the future) is a more principled point and in line with how the rating agencies assess financial resilience. Interestingly this is not an issue raised in the RIIO2 appeals.

One final general observation is the number of times the CMA reached a different decision to Ofwat because it was able to draw on more up-to-date data – on operating costs and on cost of equity. The ability of the CMA to take account of data that was not available to the regulator is explicit in both the energy and water legislation but effectively gives companies two bites at the cherry. If the numbers are moving in a helpful direction then companies can effectively choose to have their settlement judged against a later set of metrics. If not they can “stick”.

SSE code modification appeal

Ofgem’s transmission charging review was contentious, involving as it did a re-cutting of effectively a fixed “cake” of charges with, inevitably, winners and losers. There are also good reasons for thinking that the impacts on renewables might have been underplayed, given most of the work was done before Ofgem’s Damascene conversion to net zero. However, it was always unclear whether SSE would get anywhere arguing that Ofgem’s decision was “wrong”.

SSE set out six grounds of appeal, one with five sub-grounds, based on detailed legal points. The CMA rejected all SSE’s arguments. Even in the odd place where it said that it would have been better if Ofgem had taken a different approach it still concluded that Ofgem was not “wrong” to follow the course that it did. That is a strong reminder, if any is needed, that the bar is high for finding that Ofgem is “wrong”. Ofgem was probably helped by having the ESO and Centrica as interveners on their side. However, as noted above, the RIIO2 appeals have the same chair (and largely the same legal framework) so the read across is very relevant.

Next steps

Following the RIIO2 set of administrative announcements, it remains unclear whether we will hear any more about the progress of the appeal until the decision in September. On the ED1 appeal there was radio silence and you had to qualify as an intervener if you wanted to know more. It is certainly a much more closed process than the water equivalent. I continue to reiterate that transparency is important and that given the wider public policy implications of these decisions they should not be seen as purely bilateral disputes.

Learning from all these appeals, which involve significant time and costs, there clearly is a need for a wider re-think on what the best approach is going forward. Neither model is perfect. Whether the answer is a hybrid or a more fundamental change is a difficult question. The RIIO2 appeals will be an important test.

Maxine spent 15 years at Ofgem, latterly taking on responsibility for all aspects of the regulation of distribution networks. Since leaving Ofgem she has been working as an independent consultant for a mix of regulated company and consumer / community group clients.